download afbe journal issue 10, vol. 5, no. 2

AFBE JOURNAL

Volume 5, No. 2, December, 2012

ISSN 2071-7873

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TABLE OF CONTENTS

ACADEMIC PAPERS

Jamnean Joungtrakul, Brian Sheehan, Byoung Mohk Choi, Vipawan

Klinhom, Chuleeporn Lakhanapipat, “Rigor in Qualitative Research: A

Comparative Study of Qualitative Doctoral Dissertations Submitted to

Universities in The USA and Thailand 2001-2010”

113

Neha Kalra, Shaveta Gupta, Rajesh Bagga, “Non-Performing Assets: A

Brunt on Financial Performance of Banks”

129

Oswald Mascarenhas, Ram Kesavan, Michael Bernacchi, “The Ethics of Global

Marketing: An Evolutionary Approach” 151

Razzaque H Bhatti, “The Profitability of Carry Trade: Evidence for Five CIS

Countries” 179

Steven J. Balassi, Richard H. Courtney, William Lee, “Does Adding

Intermediate Algebra as a Prerequisite for Economics Principles Courses

Improve Student Success?”

192

Voinov Vassilly, Pya Natalya, Makarov Rashid, Voinov Yevgeniy,

“Goodness-Of-Fit Tests for Two-Dimensional Circular Normal

Probability Distribution”

201

Rachaya Indanon, “Case Study of Ubon Ratchathani Rice Farmers: Thai

Government‟s Responsibility in Supporting The Export Of Rice” 219

113

RIGOR IN QUALITATIVE RESEARCH: A COMPARATIVE STUDY OF

QUALITATIVE DOCTORAL DISSERTATIONS SUBMITTED TO UNIVERSITIES

IN THE USA AND THAILAND 2001-2010

Jamnean Joungtrakul, LL.B., DBA.

Professor of Human Resource Management, School of Global Business,

Far East University, Korea

Chair of DBA Program, Rattana Bundit University (RBAC), Thailand

E-mail: [email protected]

Brian Sheehan, Ph.D.

President, Asian Forum on Business Education

E-mail: [email protected]

Byoung Mohk Choi, Ph. D.

Professor and Dean of School of Social Works, Far East University, Korea

E-mail: email: [email protected]

Vipawan Klinhom, Ph. D.

Faculty Member, School of Management, Walailak University, Thailand

[email protected]

Chuleeporn Lakhanapipat, Ph.D. (Candidate)

International Graduate Studies Human Resource Development Center

Faculty of Education, Burapaha University, Thailand

[email protected]

ABSTRACT

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The objective of this study is to explore the current practices of an application of rigor

strategy in qualitative research conducted by Ph.D. candidates in the USA and in Thailand.

To guide the study three questions were posed: (1) has the researcher explicitly identified

rigor issues in the research? (2) Is literature related to rigor reviewed and presented? (3)

What rigor strategies are identified and applied? To answer these questions the concept of

rigor, rigor strategies, and the application of rigor strategy in qualitative dissertations were

reviewed. Ten qualitative dissertations each conducted by Ph.D. candidates from 2001-2010

in the USA and in Thailand were selected for review and evaluation. Discussions,

conclusions and recommendations were then made. The findings of this study reveal that the

conduct of qualitative research in the USA is more advanced than those conducted in

Thailand in terms of rigor in qualitative research. At the same time major improvement is

needed in the conduct of qualitative research in Thailand. This indicates that there is a lack

of knowledge and understanding of the importance of rigor of research especially in

qualitative research. There is also a lack of knowledge and understanding of rigor issues,

rigor criteria and strategy and how to apply them in qualitative research. To improve the

current situation in Thailand the following recommendations are made: (1) all research

training courses should include the rigor issue; (2) university research courses should

include rigor issues in research especially in qualitative research; (3) rigor of research

awareness programs should be developed and implemented to create awareness of all

research stakeholder groups.

Keywords :Qualitative Research, Rigor, Rigor Criteria, Rigor Strategy, Qualitative

Dissertation.

INTRODUCTION

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This paper is adapted and expanded from the original study of “Rigor Strategies Application

in Qualitative Research: A Study of Qualitative Doctoral Dissertations Submitted to

Universities in Thailand 2001-2010” (Joungtrakul et al. 2012). A study of rigor strategies

application in qualitative research (QR) doctoral dissertations submitted to universities in the

USA during 2001-2010 was made and added to this paper. It aims to understand the current

practices of the application of rigor strategy in QR conducted by Ph.D. candidates in the USA

and Thailand. To guide the study three questions were posed: (1) has the researcher explicitly

identified rigor issues in the research? (2) Is literature related to rigor reviewed and

presented? (3) What rigor strategies are identified and applied? To answer these questions the

concept of rigor, rigor strategy, and the application of rigor strategy in QR dissertations were

reviewed. The review of several concepts in this part is adapted from the original study by

Joungtrakul, et al., 2012. Ten QR dissertations conducted by Ph.D. candidates from 2001-

2010 in the USA were selected and evaluated against the three posed questions. A

comparison of this study was made with the study of ten QR dissertations submitted to

universities in Thailand made in the original study by Joungtrakul, et al. (2012), and

similarities and differences were identified. Discussions, conclusions and recommendations

were then made. The limitations of the study follow.

THE CONCEPT OF RIGOR

As described by Joungtrakul, et al.. (2012), Lincoln & Guba (1985) suggested that, to be

asked to ensure the trustworthiness of their study, researchers should focus on the following

questions: (1) how can the investigator establish confidence in the “truth” of the findings of a

particular study?; (2) How can the investigator determine the extent to which the findings of

the particular study have applicability in other contexts or with other participants?; (3) How

can the investigator determine whether the findings of the study would be repeated if the

study were replicated with the same or similar participants in the same or similar context?;

and (4) how can the investigator establish the degree to which the findings of the study are

determined by the participants and conditions of the study and not the biases, motivation,

interests, or perspectives of the researchers? They further argued that trustworthiness is

demonstrated through credibility, transferability, dependability, and confirmability. They

suggested specific strategies be used to attain trustworthiness such as negative cases, peer

debriefing, prolonged engagement and persistent observation, audit trails and member checks

(Morse et al., 2002).

However, Morse, et al.. (2002) expressed their concerns that “there has been a tendency for

qualitative researchers to focus on the tangible outcomes of the research… rather than

demonstrating how verification strategies were used to shape and direct the research during

its development.” (p. 17). They further elaborated that “while strategies of trustworthiness

may be useful in attempting to evaluate rigor, they do not in themselves ensure rigor. While

standards are useful for evaluating relevance and utility, they do not in themselves ensure that

the research will be relevance and useful.” (p. 17). They argued that strategies for ensuring

rigor must be built into the process of the qualitative research and proposed the following

strategies: (1) investigator responsiveness; (2) methodological coherence; (3) theoretical

sampling and sampling adequacy; (4) an active analytical stance; and (5) saturation. They

argued that “these strategies, when used appropriately, force the researcher to correct both the

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direction of the analysis and the development of the study as necessary, thus ensuring

reliability and validity of the complete report” (p.17).

In addition, there are many approaches to qualitative research including those from the work

of Glaser & Strauss (1967) on grounded theory, Yin (1994) on case study research, Miles &

Huberman (1994) on qualitative data analysis, Patton (1990) on triangulation etc. These

approaches have some differences of rigor consideration. For instance, a multiple-case design

within the positivist tradition (Yin, 1994), has its basics in the natural sciences which takes an

objective physical and social world that exists independent of humans. The major role of

researchers is to discover this reality by crafting precise measures that will find out and

measure those dimensions of reality that the researcher is interested in it. However, the

critical point is the understanding of phenomena, a primary problem of modeling and

measurement (Orlikowski & Baroudi, 1991). Therefore, it is necessary for the researcher to

consider seriously in order to understand what is the real phenomenon including the entire

context of that phenomenon to ensure validity and reliability of the results.

Lincoln & Guba (1985) summarize rigor strategies to be used for each criterion of credibility,

transferability, dependability, and confirmability in Table 1.

TABLE 1: RIGOR STRATEGIES FOR QUALITATIVE RESEARCH

Criterion Area Technique

Credibility

Transferability

Dependability

Comfirmability

All of the above

(1) activities in the field that increase the probability of high credibility

(a) prolonged engagement

(b) persistent observation

(c) triangulation (sources, methods, and investigators)

(2) peer debriefing

(3) negative case analysis

(4) referential adequacy

(5) member checks (in process and terminal)

(6) thick description

(7a) the dependability audit, including the audit trail

(7b) the confirmability audit, including the audit trail

(8) the reflexive journal

Source: Lincoln & Guba, 1985, p. 328.

To be the basis for further understanding of rigor strategy application in qualitative research a

review is made on some rigor strategy for qualitative research in the following section.

RIGOR STRATEGY FOR QUALITATIVE RESEARCH

Rigor strategy refers to the measures that the researcher uses in controlling and enhancing the

quality of qualitative research (Joungtrakul, et al., 2012). Miles & Huberman (1994) provide

26 tactics for drawing and for verifying conclusions. They classified the strategies into 13

groups: (1) checking for representativeness; (2) checking for researcher effects; (3)

triangulating; (4) weighting the evidence; (5) checking the meaning of outliers; (6) using

extreme cases; (7) following up surprises; (8) looking for negative evidence; (9) making if-

then tests; (10) ruling out spurious relations; (11) replicating a finding; (12) checking out

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rival explanations; and (13) getting feedback from informants. Some of the most frequently

used strategies in these groups are triangulation, member checking and researcher as the

research instrument. Creswell (2009) provides eight primary strategies, “organized from

those most frequently used and easy to implement to those occasionally used and more

difficult to implement” (p. 191). These include: (1) use triangulation techniques; (2) use

member checking; (3) use rich, thick description; (4) clarify the bias the researcher brings to

the study; (5) present negative or discrepant information; (6) spend prolonged time in the

field; (7) use peer debriefing; and (8) use an external auditor. Seale (1999) suggests four

major strategies: (1) triangulation; (2) member validation; (3) analytic induction; and (4)

search for negative instances. Whiteley (cited in Joungtrakul, 2010) concentrates on four

major strategies: (1) authenticity; (2) triangulation; (3) audit trail and (4) familiarization

study.

Generally, most rigor strategies in qualitative research are based on the participants‟ theories

which assist researchers to theorise about contexts (Whiteley, 2011), as Bashir, et al (2008)

stated that “the qualitative researcher often goes to the site of the participant, enabling him or

her to develop a level of details about the individual or place to be highly involved in actual

experiences of the participants” (p. 38). In particular, the voice of the participant is utilized

gratefully in the data analysis step, including following the data in terms of organizing it into

concepts and constructs (Whiteley, 2011). Moreover, Bashir, et al.(2008) indicated that “in

qualitative studies multi-method approaches has been employed by the researcher towards the

generalizability of the research that is to enhance the reliability and validity of the research”

(p. 41). However, they suggest that “researcher bias is able to be minimized if the researcher

spends enough time in the field and employ multiple data collection strategies to corroborate

the findings” (p. 41).

RIGOR STRATEGY APPLICATION IN QUALITATIVE RESEARCH

In practice rigor strategy is usually explicitly presented in a separate section of the

dissertation proposal and the text of the final report. Literature related to rigor is presented

followed with an identification of a specific rigor strategy to be used in the research along

with the rationale justifying why the researcher selected such a rigor strategy to be applied in

the research. For example, Hocking (2002) presents a rigor strategy section on authenticity in

her dissertation as follows:

Educative authenticity was achieved because all the respondents were familiar with

research processes as the majority had university degrees and essentially the research

was about gaining the respondent‟s understanding of their world. In addition the

researcher attempted to clarify and answer questions that were posed by the

respondents as openly as possible. Catalytic authenticity was ensured by an informed

consent contract as it contained the usefulness of the research and its future

application. Tactical authenticity was ensured because the ownership of the data will

always lie with the respondents due to the confidentiality placed on their identity and

of the organization (pp. 134-135).

Further discussions and examples of rigor strategy application in qualitative research can be

found in Hocking (2002); Joungtrakul (2009); Nitimanop (2005); and Siriwaiprapan, (2000).

The application of rigor strategy in QR dissertations conducted in the USA is presented next.

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THE APPLICATION OF RIGOR STRATEGY IN QUALITATIVE RESEARCH

DISSERTATIONS CONDUCTED IN USA

Ten qualitative dissertations conducted by Ph.D. candidates in the USA during 2001-2010

were selected based on the purposive and convenience techniques for review and evaluation.

The data and information reviewed and evaluated is mostly based on the methodological and

analytical parts of the studies. A summary of each study is illustrated in Table 2.

TABLE 2: THE APPLICATION OF RIGOR STRATEGY IN QUALITATIVE

RESEARCH DISSERTATIONS CONDUCTED IN USA 2001-2010

Case

Rigor

Issues

Identified

Rigor

Literature

Presented

Rigor Strategy Applied Remarks

Case 1 yes yes Triangulation, member checks, peer

debriefing, and a reflective journal were

applied to ensure rigor in the study.

(pp.100-102)

An explanation of

rigor strategy is clear

in both reviewing

literature and

applying.

Case 2 yes no Triangulation, diverse types of documents

and sources were reviewed for study to

avoid the undue influence of any one

source. (p.167)

Negative case sampling was utilized for

analysis, and units of analysis were drawn

from a broad and varied number of

documents selected based on the

authenticity and academic or journalistic

standing of the document and its source of

publication. (p.167)

To promote validity, data collection

focused on direct, verbatim quotations and

on information found in multiple sources. .

(p.168)

Avoidance of personal prejudice, using

direct and verbatim quotations to add to

the authenticity or realism of results and to

serve to enhance the methodological

quality of the work (p.169)

Sources that had as their obvious aim

propaganda or defame the participant

were either rejected as unacceptably

biased or were not trusted as the sole

source of any one unit of analysis. (p.169)

The study consisted of a purposeful

sample of persons who were representative

of the critical elements of the phenomena

of interest. This match between participant

variables and the central constructs of the

study adds to its validity. (p.170)

An explanation of

rigor strategy

applying is clear.

However, rigor

literature review were

presented only as

references but did not

explain thoroughly in

the background and

detail of those

information.

119

Case

Rigor

Issues

Identified

Rigor

Literature

Presented


The use of published text prevents

reactivity effects in the sense that

statements were not tailored to conform to

the projected or assumed focus of this

study. (p.170)

A second coder was recruited and trained

to categorize verbatim and identical units

of analysis sets to promote or reinforce the

reliability and validity of coding

procedures. (p.170)

Case 3 yes no A field test to check the validity and

reliability of the researcher‟s interview

instrument. (p.27)

Transcribing the results of the interviews

in their entirety to allow the reader to

compare and contrast the answers to the

questions contained in the interview

instrument. (p.27)

An explanation of

rigor strategy

applying is not clear,

just presenting about

how to ensure the

quality of instrument,

interview questions

and representation

the real answering of

participants with

transcribing their

explanation.

Case 4 yes yes Incorporating secondary data collected

through program documents strengthened

the internal validity of study outcomes.

(p.56)

Piloting the interview process promoted

rigor and assured that the construction of

questions and conversational techniques

effectively yielded in-depth descriptive

data. Participants‟ responses to the

interview questions confirmed the viability

of the interview format. (p.64)

Several strategies were applied in the

qualitative tradition, embedded processes

contributed to validity (Yin, 2003), such as

protocols, triangulation, and data

crosschecks throughout the research

process minimized researcher bias and

assured accurate and credible reporting

(pp.70-71)

The use of an interview Matrix promoted

consistency in the data gathering process

(Yin, 2003). (p.71)

Semi structured interviewing involved the

consistency of thematic exploration

through questions that framed general

concepts according to the evaluation‟s

purpose (Maxwell). (p.72)

An explanation of

rigor strategy is clear.

It is not in the section

of validity, but is also

explained in other

research procedures.

It is divided into two

major parts of

validity: internal

validity and external

validity.

120

Case

Rigor

Issues

Identified

Rigor

Literature

Presented


The issue of transferability addressed

feasibility in applying the evaluation

design and methodology to similar

program settings (Yin, 2003).

Transferability of the study‟s evaluation

design to other formative evaluations is

cogent with external validity. (p.72)

Case 5 yes yes Triangulation, five triangulation

techniques were employed. First, a

triangulation technique was to evaluate

alternative approaches to categorizing the

data. Second, analytical triangulation was

also used, four of the five participants met

with the researcher to review the results of

the analysis. The third technique employed

was the use of multiple data sources. The

sources included multiple participants,

combining interview data with field notes,

and observations. The fourth technique

was the comparison of the results with the

findings from Hill‟s (1993) study. The

fifth triangulation method was that the

researcher, having made the transition

personally, was able to review the results

and verify that they were valid based upon

personal experience. (pp.75-76)

Test of credibility, an external

methodology review of this study was

conducted, that the reviewer has a Ph.D. in

Sociology and teaches graduate courses in

qualitative research methods. (p.77)

Using the data directly from the source

when possible and rich, detailed, and

concrete descriptions of people and places

were used for understanding the

phenomenon studied and drawn our own

interpretations about meanings and

significance. (p.78)

Using many participant quotes allowed the

participants in the study to speak for

themselves and researchers studying

different topics can consider the quotes

from the framework of their research and

better determine the transferability. (p.78)

An explanation of


Case 6 yes yes Data check transcribed interviews returned

to respondents. (member checking) (p.67)

Taking detailed notes of program

participation, document participant

interviews, and comments. (p.80)

A second coder was trained in the coding

process. (p.80)

An initial intercoder reliability rate was

used by following the formula

recommended by Miles and Huberman

An explanation of

rigor strategy is just a

small part. Literature

review was focused

only on the

importance of the

data analysis step.

Rigor section was

presented in the topic

of validity and

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Case

Rigor

Issues

Identified

Rigor

Literature

Presented


(1996, p. 64). The coefficient of reliability

can be interpreted as the percentage of

observed agreement between the coders.

Reliability rates that fell within the range

of the 70% and 90% agreement levels

recommended by Miles and Huberman

(1996, p. 64), and suggest that the coding

schemes were valid as applied. (pp.80-81)

Triangulation: using at least three methods

of data collection, interviews, documents,

observation and participation, and an auto-

ethnographic essay.

reliability and it was

calculated as the

method of

quantitative study.

It does not indicate

clearly in the rigor

section for the

triangulation

technique, employed

in the study.

Case 7 yes yes Pilot study (p. 78)

Training Interpreters (p. 78)

The methodology of participant

observation was used to improve the

validity of the data obtained from the

interviews. It is as the mean of

triangulation. (p.81, p.89)

The verbatim transcription approach as

“Rich Data” was used to improve the

quality of the data. (pp.83-84)

Member checking: A member check

involves providing all or a portion of a

final report to people who have served as

participants on the project, that is, who are

the members of the sample. (p.90)

An explanation of


It is not only

presented in the

quality of data

section but also

explained in each

step of research

procedure, such as

“Process of

Conducting the

Research” and

“Analysis Strategy.“

Case 8 yes yes Qualitative reliability is determined by

conducting identical interviews with

African-American human service

employees at different points in time.

(p.66)

Literature review is

just the brief concept

of validity and

reliability, mostly

shows only the

picture of the

quantitative

approach. It is not

presented clearly for

rigor strategy of the

qualitative approach

both literature review

and application. It is

indicated as only a

part of reliability.

Case 9 yes yes Validity was measured based upon

content, criterion-related, concurrent,

predictive, and construct types. Judgment

of the content was both digital (software)

and human interpretation (researcher). The

criteria involved four qualities (relevance,

freedom from bias, reliability, and

availability) to preserve the validity of the

data. The construct validity was derived

An explanation of

rigor strategy is just

small part, as validity

and reliability.

Similarly, literature

review is just the

brief concept of

validity and

reliability.

122

Case

Rigor

Issues

Identified

Rigor

Literature

Presented


from the common themes (thoughts and

ideas derived from the interviews) found

while utilizing the software. (p.86)

Case 10 yes yes Pilot test: Using the protocols approved by

the Institutional Review Board (IRB), it

aims to assist the researcher in developing

a more concise and relevant line of

questioning. The pilot study results

confirmed its goal, which was to ensure

that the instrument and guide were

understandable, concise, and viable. (pp.

57-58)

Reporting sufficient details about the

process of data collection and analysis to

enable other researchers to assess the

quality of research findings. (p.56), given

the phenomenon of executive perceptions

and experiences. (p.56)

Member-checking, peer information, peer

debriefing, external auditors, and

clarifying bias were applied to this study.

(p.56)

Much of the trustworthiness that was

achieved in this project was gained by the

use of the ATLAS/ti software package.

(P.57)

An explanation of


As shown in Table 2, most of QR dissertations conducted in the USA have provisions to deal

with rigor issues although some of them did not explicitly identify the rigor section in the

dissertations. Almost all of the QR dissertations reviewed identified ethical issues and

presented rigor related literature and rigor strategy and its application in the dissertations.

Only two (case 2 and 3) out of ten cases did not provide a literature review related to rigor.

One important point is that although rigor issues were identified and literature was presented

and rigor strategy and its application were present the presentation was made in terms of

validity and reliability as in quantitative approach. The application of rigor strategy in QR

dissertations conducted in Thailand is presented next for comparative purposes.

THE APPLICATION OF RIGOR STRATEGY IN QUALITATIVE RESEARCH

DISSERTATIONS CONDUCTED IN THAILAND

Ten qualitative dissertations conducted by Ph.D. candidates in Thailand during 2001-2010

were selected based on the purposive and convenience techniques for review and evaluation.

The data and information reviewed and evaluated is mostly based on the methodological and

analytical parts of the studies. A summary of each study is indicated in Table 3.

123

TABLE 3: THE APPLICATION OF RIGOR STRATEGY IN QUALITATIVE

RESEARCH DISSERTATIONS CONDUCTED IN THAILAND 2001-2010

Case

Rigor

Issues

Identified

Rigor

Literature

Presented


Case 1 No No No

Case 2 No No

No

Case 3 Yes No Triangulation A short statement indicating

rigor issue is made in the

research procedure section

(p. 92).

Case 4 Yes No Data examination through

Delphi Technique.

A short statement indicating

rigor issue is made in the

research procedure section

(p. 68).

Case 5 Yes No A general statement

indicating that an

examination of results with

experts was made to ensure

proper understanding with

informants.

It is not clear what rigor

strategy is being applied in

this study.

Case 6 Yes No Methodological

Triangulation.

An explanation of rigor

strategy is not clear.

Case 7 No No A general statement

indicating that the

researcher takes the result of

data analysis to present in a

workshop conducted with

key informants to ensure

mutual understanding.

It is not clear what rigor

strategy is being applied in

this study.

Case 8 No No No

Case 9 Yes Yes Triangulation A brief statement making

reference to literature on

rigor is made.

Case 10 Yes Yes Triangulation A brief statement making

reference to literature on

rigor is made.

Source: Joungtrakul, et al., 2012.

As shown in Table 3, Joungtrakul et al. (2012), there are six cases (Cases 3, 4, 5, 6, 9 and 10)

out of ten qualitative dissertations reviewed indicated rigor issue in the report of study.

However, explanation on the rigor issue is rather brief and insufficient to demonstrate that the

researcher has a thorough knowledge and understanding of it in qualitative research. Four

cases (Cases 1, 2, 7 and 8) make no mention about it at all. None of the studies reviewed and

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presented literature related to rigor with the exception of two studies (Case 9 and 10) where

the researchers made a brief statement referring to literature on rigor. However, the brief

statement provided is not sufficient to demonstrate that the researcher has sufficient

knowledge in the rigor issue in qualitative research and skills in application of it in qualitative

research. There are seven cases (Cases 3, 4, 5, 6, 7, 9 and 10) identifying and indicating the

application of rigor strategy. However, most of the rigor strategies identified were not clearly

explained. Although triangulation was mentioned in four cases (Cases 3, 6, 9 and 10) no

detailed explanation were made. There are three cases (Cases 1, 2 and 8) that make no

mention about rigor strategy identification and application.

COMPARISON OF RIGOR STRATEGY APPLICATIONS IN QR DISSERTATIONS

CONDUCTED IN THE USA AND THAILAND 2001-2010

Based on the review made in Tables 2 and 3, a comparison of the results was made based on

the three questions posed. It was found that: (1) All of dissertations conducted in the USA

identified rigor issues in the research, while there are only six dissertations conducted in

Thailand during the same period which presented rigor issues in the research; (2) The text of

the report of dissertations conducted in the USA explained rigor literature clearer than those

dissertations conducted in Thailand; (3) Most of dissertations conducted in the USA

explained the concept and theories of rigor in the report of the study. In contrast, those

dissertations conducted in Thailand presented just a brief statement referring to rigor

literature; (4) One similarity identified in this study is that triangulation is mostly used in

dissertations conducted in the USA and Thailand; and (5) dissertations conducted in the USA

described more detail about the application of rigor strategies in the report than those

dissertations conducted in Thailand.

DISCUSSION

The discussion of the findings in this study first is made corresponding to the three questions

posed. Having replied to the three questions a general discussion follows.

In replying to the first question of: (1) has the researcher explicitly identified rigor issues in

the research? In the case of the studies conducted in the USA all studies identified rigor

issues. In the case of the studies conducted in Thailand, it was found that from ten QR

dissertations reviewed, there are only six studies which presented ethical issues.

In replying to the second question of: (2) Is literature related to rigor reviewed and presented?

In the case of the studies conducted in the USA, it was found that there are only two out of

ten cases that did not provide a literature review related to rigor. In the case of the studies

conducted in Thailand, it was found that there are two studies where the researchers made a

brief statement referring to literature on rigor. However, the brief statement provided is not

sufficient to demonstrate that the researcher has sufficient knowledge in rigor issue in

qualitative research and skills in application of rigor strategy. It is essential that the Ph.D.

candidates express their rigor knowledge through the presentation of literature as many of

them will become professional researchers when they have completed their Ph.Ds.

In replying to the third question of: (3) What rigor strategies are identified and applied? In the

case of the studies conducted in the USA most studies identified rigor strategies. Several

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rigor strategies were identified and applied in different studies including triangulation and

negative cases identification. However, triangulation was the greatest rigor strategy identified

and applied. In the case of the studies conducted in Thailand, it was found that there are

seven cases which identified and indicated the application of rigor strategy. However, most of

the rigor strategies identified were not clearly explained. Although triangulation was

mentioned in four cases no detailed explanation was made. There are three cases that make

no mention about rigor strategy identification and application. It should be noted that

triangulation is the most well-known rigor strategy using in both the studies conducted in the

USA and Thailand.

The above findings reveal that improvement is needed in conducting QR in Thailand. This

study reviews ten QR Ph.D. dissertations conducted by ten candidates. As elaborated in the

original study by Joungtrakul et al.. (2012) that the major objective of the Ph.D. process is to

produce professional researchers it is the comprehensive training in which its final product is

a Ph.D. dissertation (Phillips & Pugh, 1994). Thus the Ph.D. must be an authority of both

methodology and subject matter of the dissertation (IUBMB, 2006; Phillips & Pugh, 1994).

Since rigor is one of the most important components of QR they must have thorough

knowledge of rigor issues and strategies and be able to apply them in conducting research

properly. In addition, one of the functions of the Ph.D. is to learn to teach, so it is very

important that they teach especially the teaching of undertaking research properly both in

terms of subject matter, content and methodology. If they do not understand and do not

realize the importance of rigor in research it will be very difficult to expect them to teach

rigor and the application of rigor strategies in research. This is a serious problem that needs

early resolution as Morse, et al. (2002) argued that “without rigor, research is worthless,

becomes fiction, and loses its utility” (p. 14). So, “all research must respond to canons of

quality-criteria against which the trustworthiness of the project can be evaluated” (Marshall

& Rossman, 1999, p.191). It was argued that “unless you can show your audience the

procedures you used to ensure that your methods were reliable and your conclusions valid,

there is little point in aiming to conclude a research dissertation” (Silverman, 2000, p.175).

One of the major causes of this situation might be that we have been concentrating on

teaching quantitative research in Thailand (Joungtrakul et al., 2012; Joungtrakul, 2010;

Joungtrakul, 2007; Joungtrakul, Aticomsuwan, & Someran, 2011). Although rigor is

important to all kinds of research, however, due to its nature, qualitative research requires

more attention to rigor issues. The Association of Researchers plays a key role in research

training but rigor issues are not emphasized. Joungtrakul (2010) points out ten stakeholder

groups of QR in Thailand requiring more knowledge and understanding of QR and rigor

issues in QR. They are: (1) educational institutions who design curricula and produce

professional researchers; (2) faculty members who teach research; (3) supervisors who

supervise theses and dissertations; (4) students who are conducting research for their theses

or dissertations; (5) professional researchers who conduct research for their clients; (6)

funding organizations who support research projects; (7) experts or peers who review

research papers or reports; (8) users of research; (9) the research community; and (10) the

general public. Awareness of all stakeholder groups of the importance of rigor in research

especially in QR would help improve the current situation and that rigor should be included

in all phases of research from the beginning of identifying the needs for research to the

conclusion of the research process (Joungtrakul, 2009, 2010; Joungtrakul et al. 2012;

Whiteley, 2002).

126

CONCLUSIONS AND RECOMMENDATIONS

The findings of this study reveal that samples of qualitative studies conducted in the USA are

more advanced than those conducted in Thailand in terms of rigor in qualitative research. At

the same time major improvement is needed in the conduct of QR in Thailand. It indicates

that there is a lack of knowledge and understanding of the importance of rigor issues in

conducting research especially in QR. There is also a lack of knowledge and understanding of

rigor issues, rigor strategies, and how to apply them (Joungtrakul, et al., 2012).

To improve the current situation in Thailand the following recommendations are made: (1) all

research training courses should include rigor issues; (2) university research courses should

be revised to include rigor issues; (3) rigor in research awareness programs should be

developed and implemented to create awareness of all research stakeholder groups

(Joungtrakul, et al., 2012).

LIMITATION OF THE STUDY

Although this study indicates some critical issues in rigor in qualitative research conducted in

the USA and in Thailand there are some limitations. This study reviewed ten QR studies

conducted by Ph.D. candidates in Thailand and another ten conducted in the USA during

2001-2010. These studies were selected based on the purposive and convenience techniques.

It cannot be claimed that these studies represent all QR dissertations conducted in Thailand or

the USA. In addition the ten Thai studies selected are written in Thai language. Those

dissertations submitted by Ph.D. candidates in English in Thailand or in international

programs are not included. At the same time the selection of ten QR dissertations conducted

in the USA were also made based on the purposive and convenience techniques. It cannot be

claimed that these studies represent all QR dissertations conducted in the USA. In addition

the data and information reviewed and evaluated is mostly based on the methodological and

analytical parts of the studies. A more rigorous study should be conducted for generalization

purposes.

ACKNOWLEDGEMENTS

We are grateful to Dr. Katsunori Kaneko and Nawasanan Wongprasit for their agreement to

us to use the original study of “Rigor Strategies Application in Qualitative Research: A study

of Qualitative Doctoral Dissertations Submitted to Universities in Thailand 2001-2010”

(Joungtrakul, et al., 2012), as a basis for this study.

127

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129

NON-PERFORMING ASSETS: A BRUNT ON FINANCIAL PERFORMANCE OF

BANKS

Neha Kalra

Shaveta Gupta

Rajesh Bagga

Apeejay Institute of Management Technical Campus

Jalandhar

[email protected]

ABSTRACT

Non-Performing assets (NPAs) in the banking arena is adding to the troubles of Indian

economy. It is apparent that banks in each and every economy are behind propelling of an

economic growth. And in turn, the growing economy has positive impact on the survival of

banks too in terms of augmenting demand for credit. The brisk rate of Indian economic

growth can be considered as good example of the role played by banks in the country‟s

success. Now days, banks are playing the role of credit creators and are offering number of

services by widening their area of operations. But along with the expansion of banks, have

emerged a biggest problem and that is NPAs. Though this problem is not new yet a lot of

efforts are required to be put into this specific area. So to solve this problem, a lot of

concentrated efforts with a focused approach are the need of hour and Government of India

along with RBI has started to take steps to tackle this mounting edifice of NPAs. The current

study has been carried out on nationalized banks in India in order to study the impact of

NPAs on liquidity and profitability of banks using Correlation and Multiple regression

analysis. The study bring forth that NPAs reduce the profitability of banks, weaken its

financial health and erode its liquidity. The study also reveals that the NPA to total advances

is a critical variable that not only affect the profitability of the banks but also affect the

liquidity position of the banks.

Keywords: Non-performing assets, SARFAESI, Correlation Analysis and Multiple

Regression Analysis.

INTRODUCTION

Banking sector reforms in India have sheltered facets like models for interest rates and its deregulation,

decreasing the statutory ratio requirements, the concepts of asset classification etc. But the results were not as

expected. This was because of the reason of lack of reforms related to the execution stages drawn in the

banking activities. So the preamble of transformations without the changes in the execution of work can only

add to the situation of mayhem and the conditions will only worsen rather than to improve. After India gained

independence in the year 1947 and before the era of nationalization of banks, the banking sector was the

puppet in the private hands. As the control power was with the private hands, so the big industrial house were

successful in eating out a big chunk of the financial resources for their own benefit and as per their own

priority. These kinds of activities add to the sufferings of various sectors of Indian economy. Banks directly or

indirectly affect economic development (Schumpter1961, Goldsmith 1969, Anagdi 2003) and established all

over the world to mobilize savings and invest into economy either directly or indirectly for production and

generation of income and employment (Shrivastav 1981). The importance and necessity of banking system has

been realised in post-independence period and were restructured into nationalised or public sector banks till

eighties to achieve broader economic objectives (Chhipa, 1987 Deb, 1988). It was with the nationalization of

mailto:[email protected]

130

banks in the year 1969 that all the sections of the society accepted this move as a way to revolutionise the

economic scenario of India. Government of India issued the directive to the banking sector to enlarge the base

of their activities by entering the rural areas and to sanction loans on the basis of priority to sectors like

agriculture, small-scale industries etc. To a certain extent the banking sector has achieved this mandate.

Lead Bank Scheme enabled the banking system to expand its network in a planned way and

make available banking series to the large number of population and touch every strata of

society by extending credit to their productive endeavors. The importance of bank‟s stability

in a developing economy is noteworthy as any distress affects the development plans

(Rajaraman and Vasishtha, 2002) thereby the economic progress (Thiagarajan et al. 2011).

During the decades of 1980 and 1990, banking industry throughout the world was in a state

of crisis. India was no exception. The high-flying reason for the crisis was well built edifice

of NPAs that was continuously mounting up. Numerous factors were there that lead to

escalating up of NPAs like lack of objectivity in the credit assessment of the borrowers,

loopholes in the legal system, increasing influence of politicians etc.

RBI has been taking strong measures from time to time and based on the recommendations of

the Narsimahan Committee, the landscape of Indian banking changed altogether. All the

banks were directed to follow the norms of capital adequacy, asset quality, provisioning for

NPAs, prudential norms, disclosure requirements, acceleration of pace and reach of latest

technology, streamlining the procedures and complying with accounting standards and

making financial statements transparent. The banks were not only required to take the above

steps but always evaluate their financial position from period to period. Because of this

factor, the interest of the analysts and researchers got developed to analyze, evaluate, measure

and finally manage the financial performance of the Indain banks. In this direction, the

researchers like Chidambaram and Alemelu (1994), Sarkar and Das(1997), Ajit and Bangar

(1998), Bhatia and Verma (1998), Kaur and Bhatia (1998), Padmanabhan (1998), Dasgupta

(2000), Desai and Farmer (2001), Edirisuriya and Fang (2001), Mittal (2001), Passah (2001),

Sikander and Mukherjee (2001), Khatik (2002), Sangmi (2002), Purohit et al. (2003), Kapil

and Nagar (2003), Duncan et al. (2004), Reddy (2004) and Mohanty (2006) have attempted

to make a contribution in the field.

Everyone is aware of the fact that the banking activities primarily, include borrowing and

lending of funds. As far as lending is concerned, risk is involved. The best indicator for the

health of the banking industry in a country is its level of Non-performing assets (NPAs).

NPAs are one of the major concerns for banks in India. It reflects the performance of banks.

When the lending of funds or the loan extended by the bank is not recovered or turns out to

be unproductive, then that loan is termed as Non-Performing asset. Reduced NPAs generally

gives the impression that banks have strengthened their credit appraisal processes over the

years and growth in NPAs involves the necessity of provisions, which bring down the over all

profitability of banks (Bhavani Prasad and Veena, 2011).

As per SARFAESI Act 2002, NPA is defined as an asset or borrower‟s account, which has

been classified by bank as sub-standard asset, doubtful or loss asset, in accordance with the

guidelines related to asset classification issued from time to time by RBI. Previously, the loan

and advances that remained overdue for more than 180 days were termed as NPAs but now

the time period has been reduced to 90 days with effect from 31st March 2004. The banking

system is, therefore, sure to see a bulge NPA portfolio in the coming years. This poses a

serious liquidity and credit risk on the banking system, which unless managed effectively

would jeopardize the same. NPAs include: Standard Assets, Sub-standard assets, doubtful

assets and loss assets. This classification is based on the time period when the assets remain

131

overdue but the time period may vary. But from 2005, the internationally accepted criterion

of 12 months has been applicable. No doubt that bank are playing an important role in the

development of an economy in terms of the various activities that they carry out for the

benefit of all sections of an economy, but they also suffer from some hurdles which acts as

impediment to the economy‟s growth. This obstacle is in terms of NPAs that are generated in

ordinary course of banking activities that is, lending of funds but with inefficient process. So,

ultimately this inefficiency retards the growth rate of an economy. The impact of NPAs on

the activities of a bank can be: the profits of a bank suffer a setback, cost of capital will

increase and return on investment falls. Due to mounting edifice of NPAs, RBI in co-

operation with Government undertook various measures to resolve this problem that has the

inclination of intensification if relaxations are there. So number of measures has already been

in place to tackle this problem and up to some extent, this issue is under control.

REVIEW OF LITERATURE

Realising the importance of banking sector for an economy, NPAs as an area of research has

attracted the attention of lot many researchers all over the world. Numerous researches have

been carried out from time to time in the arena of NPAs. This section covers a snapshot of the

previous studies on impact of NPAs on the financial performance of the banks.

A study by Sergio (1996) examined the non-performing loans in Italy and found that an

increase in the riskiness of loan assets was rooted in a Bank‟s lending policy adducing to

relatively unselective and inadequate assessment of sectoral prospects. Business cycle could

be a primary reason for Bank non-performing loans. But the increase in bad debts as a

consequence of recession alone was not empirically demonstrated. With many countries

adopting the policy of liberalization, a research by Brooks (2003) put forth new empirical

evidence on the impact of financial liberalization on the performance of Indian commercial

banks. The analysis focused on examining the behaviour and determinants of bank

intermediation costs and profitability during the liberalization period. The empirical results

suggest that ownership type has a significant effect on some performance indicators and that

the observed increase in competition during financial liberalization has been associated with

lower intermediation costs and profitability of the Indian banks. With the policy of

privatization resulting in more number of foreign banks entering domestic markets, a study

by Sathya (2005) examined the effect of privatization of banks on performance and

efficiency. The data taken was for five years (1998-2002) and it was analyzed by using

difference of means test. It was concluded that partially privatized banks have performed

better as compared to fully public sector banks in respect of financial performance and

efficiency.

It is apparent that banks in each and every economy are behind propelling of an economic

growth. And in turn, the growing economy has positive impact on the survival of banks too in

terms of augmenting demand for credit. Working on these lines, Dash and Kabra (2010)

analysed the sensitivity of non-performing loans to macroeconomic and bank specific factors

in India. In particular, it employed regression analysis and a panel dataset covering 10 years

(1998-99 to 2008-09) to examine the relationship between non performing loans and several

key macroeconomic and bank specific variables. The results revealed a significant positive

relationship between non-performing loans and the real effective exchange rate.

132

The liberalisation policy adopted by India in 1990s resulted in emergence of new foreign

banking players hitting Indian market resulting in increased competition in the banking

sector. A study by Saluja and Lal (2010) compared the performance of public and private

sector banks and in foreign banks in India with special reference to their NPAs. For this

purpose four banks from public sector: State Bank of India, Allahabad Bank, Bank of Baroda

and United Bank of India, from private sector: Axis Bank, HDFC Bank, ICICI Bank and

Indusind Bank, from foreign banks: Citibank, Deutsche Bank, HSBC Bank and Standard

Chartered Bank were selected and comparative analysis of all three categories was made

on the basis of gross NPAs and Net NPAs. The study inferred that there was huge difference

in NPAs of public, private and foreign banks and greater quantum of NPAs was observed in

non-priority sector than in priority sector. The results also put forth the differential

management of NPAs in different bank categories. Extending the findings of this research,

another study by Ghosh and Ghosh(2011) emphasized on management of non-performing

assets in the perspective of the public sector banks in India. This study traced the movement

of the nonperforming assets present in public sector banks of India by analyzing the financial

performance of the banks with respect to key performance indicators and management of

the non-performing assets under the purview of new policy actions and regulatory

compliance of the Reserve Bank of India. On the same lines, another research by Malyadri

and Siricha (2011) examined the state of affair of the Non performing Assets (NPAs) of the

public sector banks and private sector banks in India with special reference to weaker

sections. The study was based on the secondary data retrieved from Report on Trend and

Progress of Banking in India and was limited to the analysis of NPAs of the public sector

banks and private sector banks for the period seven (7) years i.e. from 2004-2010. The data

was analyzed by statistical tools such as percentages and Compounded Annual Growth

Rate (CAGR). The study observed that the public sector banks have achieved a greater

penetration compared to the private sector banks vis-à-vis the weaker sections.

Highlighting the importance of growth of banks in Indian economy, a study by Kaur and

Saddy (2011) put forth that non-performing assets are one of the major concerns for banks in

India. NPAs reflect the performance of banks. An attempt has been made in the paper to

explore the factors contributing to NPAs, the magnitude of NPAs, reasons for high NPAs and

their impact on Indian banking operations. Another effort in the same direction was made by

Poongavanam (2011) who analysed the mounting nonperforming assets (NPAs) in the recent

times. The paper discussed that an NPA account not only reduces profitability of banks by

provisioning in the profit and loss account, but their carrying cost is also increased which

results in excess & avoidable management attention. Similarly, Yadav (2011) found that one

fourth credit of total advances was in the form of doubtful asset in the initial year of the

nineties and had an adverse impact on profitability of public banks at aggregate or sectoral

level indicating high degree of riskiness in credit portfolio. The profitability of all public

sector banks was affected at very large extent when non-performing assets (NPAs) work with

133

other banking strategic variables and also affected productivity and efficiency. Carrying out

the research in tandem with the earlier findings, Kavitha (2012) observed in the study that

credit of total advances was in the form of doubtful asset in the past and had an adverse

impact on profitability of public sector banks. The profitability of all public sector banks was

affected at very large extent when non-performing assets (NPAs) worked with other banking

and also affected the productivity and efficiency of the banking groups. Banks directly or

indirectly affected trade and industry development.

In an attempt to explore the indicators of NPAs and its related impact, Rajput, Gupta,and

Sharma (2012) used an empirical approach to analyse the profitability indicators as a focal

point on non-performing assets (NPAs) of commercial banks in the Indian context. The

empirical findings used observation method and statistical tools like DEA, correlation,

regression and data representation techniques that identified a negative relationship between

profitability measure and NPAs. Also in another study, an attempt was made by Siraj and

Pillai (2012) where they explored movement of various NPA indicators; Gross NPA, Net

NPA, Additions to NPA, Reductions to NPA and Provisions towards NPA and compared it

with Total Advances and Total Deposits of banks up to the period ended 31st December

2011. The study utilized growth rate calculating using correlation and regression study to

analyze the movement and significance of NPA indicators during the period. The study

concluded that NPA still remains a major threat and the incremental component explained

through additions to NPA poses a great question mark on efficiency of credit risk

management of banks in India.

A final point of distinction is that our study allows for the possibility of performance

measures to respond asymmetrically to mounting NPAs, and examines the direction and

impact of relationship in the nationalised banks in India.

NEED AND OBJECTIVES OF THE STUDY

Non-performing Asset is an important parameter in the analysis of financial performance of a

bank as it results in decreasing margin and higher provisioning requirement for doubtful

debts.When the previous researches conducted on the Impact of NPA were reviewed, a wide

research gap was identified as far as the researches in Indian context are concerned.

Therefore the current research was conducted to investigate into the impact of NPA on

liquidity and profitability of nationalized banks in India. The study has been carried out in

light of the following objectives:

To explore the relationship between NPAs and performance of banks.

To measure the impact of NPA on liquidity and profitability of banks.

HYPOTHESES OF THE STUDY

The success of banking is assessed on the basis of its profit and quality of asset. A major

threat to banking sector is prevalence of Non-Performing Assets (NPAs). Michael et al.

(2006) emphasized that NPA in loan portfolio affect operational efficiency which in turn

affects profitability, liquidity and solvency position of banks. Batra (2003) noted that in

addition to the influence on profitability, liquidity and competitive functioning, NPA also

affect the psychology of bankers in respect of their disposition of funds towards credit

delivery and credit expansion. Chijoriga (2000) and Dash et al. (2010) showed the

relationship between bank failures and higher NPAs worldwide. Brooks (2003), Ghosh and

134

Ghosh (2011), Poongavanam (2011), Kavitha (2012) and Rajput, Gupta and Sharma (2012)

examined that the profitability of all banks was affected at very large extent when a high level

of non-performing assets (NPAs) constituted the portfolio. In order to examine the same in

case of nationalised banks in India, the following null hypotheses were framed and tested:

H01: There is no significant impact of holding of Non- performing assets on the profitability

of nationalized banks in India.

H02: There is no significant impact of holding of Non- performing assets on the liquidity of

nationalized banks in India.

DATA BASE AND METHODOLOGY

In order to carry out the study, secondary data has been extracted from annual reports of

banks, Journal of Indian Banking Association and Report on Trend and Progress of Banking

in India and statistical tables relating to banks in India as published by RBI. The final list of

variables has been identified after a brief review of studies of Saluja and Lal (2010), Sangmi

and Nazir (2010) and Siraj and Pillai (2012). The data has been collected regarding different

parameters affecting the profitability and liquidity of the banks and has been segregated into

dependent and independent variables as given in table 1. Here return and Liquidity have been

taken as the dependent or the criterion variable and Gross NPA, Net NPA, provision coverage

ratio and Capital adequacy ratio have been taken as the independent or the predictor

variables.

TABLE 1 DESCRIPTION OF DEPENDENT AND INDEPENDENT VARIABLES

FACTOR VARIABLE DESCRIPTION OF VARIABLE

INDEPENDENT VARIABLES

NON

PERFORMING

ASSETS (NPA)

Gross NPA Ratio Gross NPA/Gross Advances

Net NPA Ratio Net NPA/Net Advances

Net NPA = Gross NPA – (Balance in Interest Suspense account +

DICGC/ECGC claims received and held pending adjustment +

Part payment received and kept in suspense account + Total

provisions held)

Provision Coverage

Ratio

Total Provision/Gross NPA

Capital Adequacy Ratio Qualifying capital/risk adjusted (or weighted) assets

DEPENDENT VARIABLES

PROFITABILITY Return on Net Worth Net Profit/ Net Worth

LIQUIDITY

Current Ratio Current Assets/Current Liabilities

Quick Ratio Quick Assets/Current Liabilities

Source: Authors‟ own.

Statistical Tools and Techniques of Analysis

Dash and Kabra (2010), Yadav (2011) and Rajput, Gupta and Sharma (2012) and Siraj and

Pillai (2012) have made use of correlation and multiple regression methodologies to test the

impact of NPAs on liquidity and profitability of banks. Following their methodologies, in

135

order to analyse the data in the present study, Correlation and Multiple Regression approach

have been used. For this purpose, SPSS has been meticulously used. Correlation Analysis

The Bivariate Correlations procedure computes the pairwise associations for a set of variables and

displays the results in a matrix. It is useful for determining the strength and direction of the

association between two scale or ordinal variables. Under this Pearson correlation coefficients have

been computed which measure the degree of linear association between two variables. The correlation

table shows correlation coefficients ranging in value from –1 (a perfect negative relationship) and +1

(a perfect positive relationship). A value of 0 indicates no linear relationship.

Multiple Regression Analysis Multiple Regression Analysis is a statistical technique which analyses the linear relationship between

a dependent variable and multiple independent variables by estimating coefficients for the equation

for a straight line. The linear regression model assumes that there is a linear, or "straight line,"

relationship between the dependent variable and each predictor variable. On the lines of the study

based on regression analysis carried out by Elder, Miao and Ramchander (2012), in order to examine

the impact of NPA on the performance of the firms, univariate and stepwise regression analysis has

been applied. Stepwise regression analysis is procedure in which the predictor variables enter or are

removed from the regression equation one at a time. The purpose of this procedure is to select from a

large number of predictor variables a subset of variables that account for most of the variation in the

dependent or the criterion variable.

RESULTS AND DISCUSSIONS

The results have been presented in two sections. The first section briefs the results of correlation

analysis and second section covers the results of multiple regression analysis. Table 2 shows the

Pearson correlation coefficients of the dependent and the independent variables.

136

TABLE 2 CORRELATIONS ANALYSIS OF NPA WITH PROFITABILITY AND LIQUIDITY MEASURES

Gross

NPA Ratio

Net

NPA Ratio

Provision

Coverage Ratio

Capital

Adequacy Ratio

Return

On Net Worth

Current

Ratio

Quick

Ratio

Gross NPA

Ratio

Pearson Correlation 1 .253 -.224 -.345* -.728

** -.542

* -.415

Sig. (2-tailed) .296 .357 .043 .000 .017 .077

N 19 19 19 19 19 19 19

Net NPA

Ratio

Pearson Correlation .253 1 -.305 -.211 -.272 -.035 -.347

Sig. (2-tailed) .296 .205 .385 .260 .887 .145

N 19 19 19 19 19 19 19

Provision

Coverage

Ratio

Pearson Correlation -.224 -.305 1 .313 .120 -.203 -.013

Sig. (2-tailed) .357 .205 .192 .624 .404 .958

N 19 19 19 19 19 19 19

Capital

Adequacy

Ratio

Pearson Correlation -.345* -.211 .313 1 .268 -.359 .457

*

Sig. (2-tailed) .043 .385 .192 .267 .132 .049

N 19 19 19 19 19 19 19

Return On Net

Worth

Pearson Correlation -.728**

-.272 .120 .268 1 -.313 .300

Sig. (2-tailed) .000 .260 .624 .267 .192 .212

N 19 19 19 19 19 19 19

Current Ratio

Pearson Correlation -.542* -.035 -.203 -.359 -.313 1 -.366

Sig. (2-tailed) .017 .887 .404 .132 .192 .124

N 19 19 19 19 19 19 19

Quick Ratio

Pearson Correlation -.415 -.347 -.013 .457* .300 -.366 1

Sig. (2-tailed) .077 .145 .958 .049 .212 .124

N 19 19 19 19 19 19 19

137


Gross

NPA Ratio

Net

NPA Ratio

Provision

Coverage Ratio

Capital

Adequacy Ratio

Return

On Net Worth

Current

Ratio

Quick

Ratio

Gross NPA

Ratio


** -.542

* -.415

Sig. (2-tailed) .296 .357 .043 .000 .017 .077

N 19 19 19 19 19 19 19

Net NPA

Ratio


Sig. (2-tailed) .296 .205 .385 .260 .887 .145

N 19 19 19 19 19 19 19

Provision

Coverage

Ratio


Sig. (2-tailed) .357 .205 .192 .624 .404 .958

N 19 19 19 19 19 19 19

Capital

Adequacy

Ratio


*

Sig. (2-tailed) .043 .385 .192 .267 .132 .049

N 19 19 19 19 19 19 19

Return On Net

Worth


-.272 .120 .268 1 -.313 .300

Sig. (2-tailed) .000 .260 .624 .267 .192 .212

N 19 19 19 19 19 19 19

Current Ratio


Sig. (2-tailed) .017 .887 .404 .132 .192 .124

N 19 19 19 19 19 19 19

Quick Ratio


Sig. (2-tailed) .077 .145 .958 .049 .212 .124

N 19 19 19 19 19 19 19


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

138


Gross

NPA Ratio

Net

NPA Ratio

Provision

Coverage Ratio

Capital

Adequacy Ratio

Return

On Net Worth

Current

Ratio

Quick

Ratio

Gross NPA

Ratio


** -.542

* -.415

Sig. (2-tailed) .296 .357 .043 .000 .017 .077

N 19 19 19 19 19 19 19

Net NPA

Ratio


Sig. (2-tailed) .296 .205 .385 .260 .887 .145

N 19 19 19 19 19 19 19

Provision

Coverage

Ratio


Sig. (2-tailed) .357 .205 .192 .624 .404 .958

N 19 19 19 19 19 19 19

Capital

Adequacy

Ratio


*

Sig. (2-tailed) .043 .385 .192 .267 .132 .049

N 19 19 19 19 19 19 19

Return On Net

Worth


-.272 .120 .268 1 -.313 .300

Sig. (2-tailed) .000 .260 .624 .267 .192 .212

N 19 19 19 19 19 19 19

Current Ratio


Sig. (2-tailed) .017 .887 .404 .132 .192 .124

N 19 19 19 19 19 19 19

Quick Ratio


Sig. (2-tailed) .077 .145 .958 .049 .212 .124

N 19 19 19 19 19 19 19

*Correlation is significant at the 0.05 level (2-tailed).

139

The perusal of results in table 2 reveals that the Pearson‟s correlation coefficient of Gross

NPA ratio and return on net worth is -0.728 at 0.01 level of significance indicating presence

of negative and highly significant correlation. It clearly shows that a higher ratio of non-

performing assets to advances for nationalized banks results in a corresponding fall in return

on net worth for banks. It is so because, gross NPA reflects the quality of the loans made by

banks. It consists of all the non standard assets like sub-standard, doubtful and loss assets.

Because of the money getting blocked the prodigality of bank decreases not only by the amount

of NPA but NPA leads to opportunity cost also so that much of profit

invested in some return earning project/asset. The NPAs do not generate interest income for

banks but at the same time banks are required to provide provisions for NPAs from their

current profits. So NPA not only affect current profits but also future stream of

profit, which may lead to loss of some long-term beneficial opportunity.

Further the correlation coefficient of gross NPA and current ratio is -0.542 at 0.05 level of

significance depicting existence of negative correlation. It can be inferred that a rise in the

gross NPA ratio of the banks results in deterioration of liquidity (current ratio) for banks.

Since money is getting blocked and profits are declining due to increased Gross NPA ratio, it

leads to lack of enough cash at hand which fosters borrowing money for shortest

period of time leading to additional cost to the company, difficulty in operating

the functions of bank and delays in making routine payments.

Also the correlation coefficient of capital adequacy ratio and quick ratio is 0. .457 at 0.05

level of significance, showing that banks in India have been able to manage high level of

CRAR to provide adequate cushion for any unexpected losses which ultimately improving

their liquidity position and also resulting in less quantum of gross NPAs by banks (evident

from the coefficient of capital adequacy ratio and gross NPA i.e., -.345*

at 0.05 level of

significance).

The Pearson correlation coefficients of the other variables are found to be insignificant. Since

some NPA variables have been found to have significant correlation with the dependent

variables of return and liquidity, therefore to further analyse the impact of NPA on returns

and liquidity of the nationalized banks in India, the data has been regressed.

Multiple Regression Analysis

Having established the nature of association of NPAs and performance measures in case of

nationalised banks in India, we now investigate the degree of impact of increased NPAs in

banks portfolios on its performance. In the first step we fit a univariate regression model of

the following form:

Y1 = a + b1X1 + b2 X2 + b3 X3 + b4 X4 + u-------------- (1) Where Y= Return on Net Worth,

X1= Gross non- performing asset Ratio; a= intercept, b=regression parameter; u= standard error.

X2= Net non- performing asset Ratio

X3= Provision coverage Ratio

X4= Capital adequacy Ratio

Y2 = a + b1X1 + u -------------------------------------- (2)

Where Y2= Current Ratio,

Y3 = a + b1X1 + u -------------------------------------- (3)

Where Y3= Quick Ratio,

140

The table 3 reports the estimated univariate regression models for the impact of NPAs on the

profitability (return on net worth) and liquidity (current ratio and quick ratio) of nationalised

banks.

141

TABLE 3 IMPACT OF NPAS ON PROFITABILITY AND LIQUIDITY OF BANKS: RESULTS FROM UNIVARIATE

REGRESSIONS.

Return on Net worth Current Ratio Quick Ratio

Non-

Performi

ng Assets

Optimal

regressors

β

T-stat Collinearity

Statistics

Tolerance

VIF

β

T-stat Collinearity

Statistics

Tolerance VIF

β

T-stat Collinearity

Statistics

Tolerance

VIF Gross NPA -.709 -3.599 .841 1.189 -.510 -2.218 .841 1.189 -.272 -1.198 .841 1.189

Net NPA -.112 -.576 .867 1.154 -.237 -1.044 .867 1.154 -.282 -1.260 .867 1.154

Provision

Coverage -.081 -.408 .837 1.195 -.098 -.424 .837 1.195 -.282 -1.241 .837 1.195

Capital

Adequacy .025 .128 .818 1.222 -.202 -.867 .818 1.222 .392 1.702 .818 1.222

R2 .543 .377 .393

F- Ratio 4.163 2.118 2.270

p-value .020a .133 .113


Notes: a Indicate significance at the 5% level.

142

Table 3 reports estimated coefficients with corresponding standardized β values, t-statistics,

collinearity stats, adjusted R-squares, F-ratio and p-values obtained from univariate regression

models. The standardized beta coefficients show how strongly the independent variable is associated

with the dependent variable, when adjusted for standard error to provide more comparable results.

The t and Sig (p) values give a rough indication of the impact of each predictor variable – a big

absolute t value and small p value suggests that a predictor variable is having a large impact on the

criterion variable. The F- test value helps to determine whether the model is a good fit for the data.

The variance inflation factor (VIF) was used to assess the multi-collinearity and the VIF scores ranged

between 1.154 and 1.222. Threshold values of tolerance above .10 (Hair et al. 1998) and VIF scores

of less than 10 suggest minimal multi-collinearity and stability of the parameter estimates (Neter et al.

1985; Dielman, 1991).

The results are discussed for the NPAs and performance of the banks. We notice that when

all the predictor variables were taken together in univariate regression analysis, all three

performance indicators were found to be sensitive to NPAs, but in different ways. In

particular, a significant relation was identified between NPAs and return on net worth causing

a variance of 54.3%, with an F-value of 4.163. The results were significant at less than 5%

level of significance. In addition to the above results, the other two liquidity measures,

current ratio and quick ratio, were affected by NPAs to the tune of 37.7% and 39.3%

respectively, but these results were found to be insignificant.

In addition to estimating the full model, we also estimate a stepwise regression model that

identifies a restricted set of regressors in the joint model with the most influential factors.

Stepwise regressions allow some or all of the independent variables in a standard linear

regression to be chosen automatically from a set of variables. We also check for consistency

of the stepwise coefficients with the univariate model containing all variables in the system.

We also allow for manual additions of selected factors from categories that are not

represented in the stepwise approach. The stepwise regression results, which are reported in

Table 4, are largely consistent with the univariate regression results discussed earlier.

The table 4 reports the estimated coefficients with corresponding t-statistics, p-values and

adjusted R-squares obtained from stepwise regression models for the impact of NPAs on the

profitability (return on net worth) and liquidity (current ratio and quick ratio) of nationalised

banks.

143

TABLE 4 STEPWISE MODELS OF IMPACT OF NPAS ON PROFITABILITY AND LIQUIDITY OF BANKS

Return on Net worth Current Ratio Quick Ratio

Non-

Performing

Assets

Optimal

regressors

β

T-stat Optimal

regressors

β

T-stat Optimal

regressors

β

T-stat

Intercept 24.361 14.039 Intercept .012 2.325 Intercept -

21.459

.9888

Gross NPA -.728 -4.375a Gross NPA .542 2.658

b Capital

adequacy .457 2.116

b

Adjusted R2 .502 Adjusted R

2 .252 Adjusted R

2 .162

F- Statistics 19.138a F- Statistics 7.063

a F- Statistics 4.479

b


Notes: a Indicate significance at the 1% level.

b Indicate significance at the 5% level.

144

The regression equation for non-performing assets on profitability and liquidity at aggregate

level is:

Y1 = a + b1X1 + b2 X2 + b3 X3 + b4 X4 + u-------------- (4)

Where Y= Return on Net Worth,

X1= Gross non- performing asset Ratio; a= intercept, b=regression parameter; u= standard

error.

X2= Net non- performing asset Ratio

X3= Provision coverage Ratio

X4= Capital adequacy Ratio

Y2 = a + b1X1 + u -------------------------------------- (5)

Where Y2= Current Ratio,

Y3 = a + b1X1 + u -------------------------------------- (6)

Where Y3= Quick Ratio,

We notice that several Gross NPAs and Capital adequacy, as a measure of NPAs have

a significant impact on performance indicators viz. return on net worth, current ratio

and quick ratio. All three performance indicators are sensitive to NPAs, but in

different ways. The stepwise regression picks up only the Gross NPAs which have an

impact on the Profitability and liquidity at the 5% significance level. In particular,

Gross NPA has a negative influence on banks performance (return on net worth and

current ratio), and a negative association has been established between capital

adequacy and quick ratio. Here the t-value for Gross NPA ratio is significant at less

than 1% level of significance showing that it has a huge impact on Return on Net

Worth.

In interpreting the adjusted R-square values, it is worth pointing out that Gross NPA

indicator has the highest degree of explanatory power in the regressions for return on

net worth (53%) and current ratio (29%). The results also indicate that alone Capital

adequacy ratio causes a variance of 20% in quick ratio. It shows that as the capital

adequacy ratio increases, it enhances the liquidity (quick ratio) of banks. The F- test

value determines whether the model is a good fit for the data. For the Return on net

worth, F-ratio is 19.138, highly significant at less than 1% level of significance, for

current ratio the F-value is 7.063, and for quick ratio, the F-value is 4.479, significant

at less than 5% level of significance in both the cases.

The results in Table 4 provide meaningful insights into the nature of the relationship

between NPAs and performance of the banks. If the results of correlation and

regression analysis are summated, it is clear that a high level of NPAs suggests high

probability of a large number of credit defaults that affect return on net-worth of

banks. The loan portfolio of banks with NPAs also reduces the liquidity position of

the credit institution. Since money is getting blocked and profits are declining due to

145

increased Gross NPA ratio, it leads to lack of enough cash at hand which fosters

borrowing money for shortest period of time leading to additional cost to

the company, difficulty in operating the functions of bank and delays in making

routine payments. A bank's capital ratio is the ratio of qualifying capital to risk

adjusted (or weighted) assets. The RBI has set the minimum capital adequacy ratio at

9% for all banks. A ratio below the minimum indicates that the bank is not adequately

capitalized to expand its operations. The ratio ensures that the bank do not expand

their business without having adequate capital. This signifies that Indian banks

successfully managed to meet the increased capital requirement under the changed

framework and it has enhanced its liquidity position. Again, the increase in CRAR,

however, has reduced the quantity but cannot undermine the fact that quality of

advances has deteriorated for nationalised banks in India in recent years. The results

of the study have lead to the rejection of null hypotheses H01 and H02 indicating a

significant negative impact of holding of Non- performing assets on the profitability

and liquidity of nationalized banks in India.

The results of the present study has been documented in earlier studies of Michael et

al.. (2006), Batra (2003), Chijoriga (2000), Dash et al. (2010), Brooks (2003), Ghosh

and Ghosh (2011), Poongavanam (2011), Kavitha (2012) and Rajput, Gupta and

Sharma (2012).

CONCLUSIONS

Non-performing assets are assets which cease to generate any income for the bank.

These have become the major concern of banks in India. It is just not a problem for

the banks; they are bad for the economy too. The money locked up in NPAs is not

available for productive use and adverse effect on banks' profitability is there.

Nationalised banks are under severe pressures of NPAs as compared to its

counterparts that private and foreign banks. The paper deals with understanding the

concept of NPAs and investigating into the impact of NPA on liquidity and

profitability of nationalized banks in India. Here profitability and Liquidity have been

taken as the dependent or the criterion variable and Gross NPA, Net NPA, provision

coverage ratio and Capital adequacy ratio have been taken as the independent or the

predictor variables. The data has been analyzed by employing Correlation and

Multiple Regression approach with the help of SPSS. The results revealed that a

higher level of NPA in the portfolio of the banks has an adverse impact on

profitability of public banks. An NPA account not only reduces profitability of banks

by provisioning in the profit and loss account, but their carrying cost is also increased

which results in excess & avoidable management attention. Apart from this, a high

level of NPA also puts strain on a banks net worth because banks are under pressure

to maintain a desired level of Capital Adequacy and in the absence of comfortable

profit level, banks eventually look towards their internal financial strength to fulfil the

146

norms thereby slowly eroding the net worth. The enormous provisioning of NPA

together with the holding cost of such non-productive assets over the years has acted

as a severe drain on the profitability of the banks. NPA is not merely non-

remunerative. It is also cost absorbing and profit eroding. The study reveals that the

level of Non Performing Assets (Credit Risk) has a significant negative influence on

the profitability and liquidity of banks. The NPAs do not generate interest income for

banks but at the same time banks are required to provide provisions for NPAs from

their current profits. The negative influence of the NPA to total advances is a critical

variable that not only affect the profitability of the banks but also can undermine the

very existence of the banking sector. To improve the efficiency and profitability of

banks the NPA need to be reduced and controlled.

147

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151

THE ETHICS OF GLOBAL MARKETING:

AN EVOLUTIONARY APPROACH

Oswald Mascarenhas

Saint Aloysius College

Mangalore-575022

India

Ram Kesavan

University of Detroit Mercy

4001 W McNichols Rd

Detroit MI 48221

USA

Michael Bernacchi

University of Detroit Mercy

4001 W McNichols Rd

Detroit MI 48221

USA

Corresponding Author: [email protected]

ABSTRACT

With all the recent changes in the global marketing arena, global management ethical

responsibilities in general and global marketing ethical responsibilities in particular,

increase. Global distributive justice in marketing calls for extensive global cooperation,

including a commitment from multinational corporations to help “distribute” prosperity to

the less fortunate among us. Our central thesis is that since global marketing is the

generalization of all domestic to non-domestic marketing strategies and institutions, the

former should include the ethical imperatives of all the latter institutions. Specifically, we

invoke the normative theory of distributive justice to spell out the micro ethical imperatives of

global marketing. We trace the evolution of global marketing from its predecessor domestic

to non-domestic marketing strategies and institutions and derive ethical imperatives for

global marketers.

INTRODUCTION

During the last four to five decades, domestic marketing strategies have evolved and

expanded into many non-domestic marketing areas such as export marketing, foreign


152

marketing, international marketing, multinational marketing, and global marketing. These

strategies have also penetrated via several intermediaries such as multi-cultural marketing,

multi-domestic marketing, pan-regional marketing, transnational and Internet marketing.

Recently, there has been significant interest on issue concerning business ethics among

multinationals firm (Budden and Budden 2011; Chan, Fung and Yau 2009; Chitakornkijsil

2011; Choi, Kim and Kim 2010; McKinney and Moore 2008; Pies 2010). In this article, we

review the historical transitioning of domestic to global marketing strategies and evaluate its

evolution from the viewpoint of the ethical normative theory of distributive justice. An

analysis of the evolutionary process can unravel institutional and well-accepted ethical and

moral imperatives.The historical evolution of domestic to global marketing provides a

rational justification for its ethical imperatives.

The emergence and sustained management of global resources, human skills, production,

distribution and marketing imply many new or augmented corporate responsibilities. Global

corporations have progressively become aware of this and have, therefore, sought a united

front to reflect and formulate some commonly agreed responsibilities. Their first outcome

was the Caux Round Table Principles for Socially Responsible Business Practices formulated

in Caux, Switzerland by executives from representative global corporations. The goal of the

principles was to set a world standard against which business behavior could be assessed, a

yardstick that individual multinational or global companies could use to write their own

business codes. The grounding principles are rooted in two basic ethical ideals: human

dignity (sacredness and value of each person as an end, and not simply as a means to the goals

of others), and koysei (a Japanese term for living and working together for the common good

that enables cooperation and mutual prosperity with healthy and fair competition).

The Caux Principles offer a basic ethical background against which concrete global corporate

ethics behavior must be assessed. The Principles, however, need much more specificity and

teeth. The Caux Principles are macro-ethical principles that require detailed micro ethical and

moral imperatives. This paper provides such detail. Our approach is new in several ways: a)

We are blueprinting micro the ethics of global marketing as opposed to global corporate

ethics that the Caux Principles represent; b) We derive the evolution of global marketing

ethical principles by tracing the growth of domestic marketing to global marketing via several

intermediary strategies and institutions that postures the principles as being a posteriori rather

than a priori as does the Caux Principles; c) We invoke the normative theory of distributive

justice, both individual and social justice principles to global marketing ethics in a

comprehensive manner..

This paper, accordingly, has three parts: 1) Historical development of domestic to global

marketing strategies and institutions; 2) Discussion and presentation of the theory of

Distributive Justice, and 3) Derivation of micro ethical and moral imperatives from the

evolutionof domestic to global marketing. In sum, we discuss practical managerial and

marketing implications of these ethical imperatives.

A HISTORICAL DEVELOPMENT OF DOMESTIC TO

153

GLOBAL MARKETING STRATEGIES

We trace the historical evolution of various marketing strategies and institutions from

domestic to global marketing as they developed in the history of corporate strategy. This

evolution is best characterized into three distinct stages: strategies and institutions that

primarily focused: a) on marketing of goods and services; b) on production and marketing of

goods and services; and c) on the entire process of management from product design to

market launch.

Marketing Strategies that Focus Primarily on Marketing:

Domestic Marketing: Historically marketing starts as the selling of domestically produced

products and services. Companies are designated as domestic if their foreign content (as

measured by percentage of sales, operating profits, employees, and assets) is less than, say, 10

to 15 percent (Quian 1998). In the initial stage, the innovating company produces and

markets the product at home to its growing market (Wells 1968), and marketing, therefore,

targets its domestic market (Jeannet and Hennessey 1998: 4). Thus, historically the first

marketing strategy is always domestic marketing that is adapted to meet the needs and wants

of its domestic consumers.

Multicultural Marketing: Is a more recent development of domestic marketing. It is

marketing to diverse nationality-ethnicity-specific target groups that are large and steadily

growing within a country. If the set target markets also have high-buying power (e.g., White

Caucasian, Afro-American, Hispanic-Mexican, or Pacific-Asian in the USA), then these are

multicultural markets that marketers must tailor their products and services to such that their

cultural and sub-cultural sensitivities are safeguarded – this is multicultural domestic

marketing strategy. This strategy is capturing executive attention in recent years (e.g.,

Deresky 2003; Harris and Moran 2000; Lee 1996; Linowes 1993).

Export and Import Marketing: Despite strong domestic and multicultural marketing,

however, rival brands and products from competing domestic companies begin to challenge

the domestic innovating company, and eventually, with the saturation of domestic markets,

export marketing emerges. The international product cycle (IPC) theory of Vernon (1966) as

applied by Wells (1968) maintains that as domestic production increases above the home

market demands, the firm turns to exports and develops markets in other developed countries.

When these new markets get saturated with both foreign exporters and local producers, the

firms shift their trade to the Third World markets. Export Marketing is marketing to foreign

consumers outside one‟s domestic base of operation and mostly consists of shipping products

from home (domestic) country to host countries. Conversely, when quality products and

services are more cheaply available abroad than in domestic markets, or are not just produced

domestically, then import marketing arises.

Foreign and Regional Marketing: When export marketing transits from sporadic ad hoc

transactions or discrete exchanges of one-time orders at list prices to long-term exporter-

importer relationships of continuous ordering at bargained prices and negotiated currency

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choices, then we move into the domain of foreign marketing. Foreign marketing is

“marketing in foreign countries” (Johansson 2000: 9). Foreign marketing implies developing

export channels such as export branches, sales-districts, local warehousing, local brokers,

local distribution centers, and local advertising and promotion programs - all these activities

are primarily geared to fight local (host) competition. This is the stage of intensive

international trade, and the classical theories of country-specific absolute advantage and

country-specific comparative advantage come into play. Both comparative and absolute

advantages get exploited in the process of bilateral or multilateral trade between exporting

(domestic) companies and importing (host) companies. Given the diseconomies of scale still

associated with foreign marketing strategies tailored to each market country, however,

multinational companies begin to emphasize marketing strategies for larger trade areas that

embrace several preference-based markets and countries – this is Regional Marketing that

covers several countries within a trade area (e.g., EU, NAFTA, Pacific Rim, ASEAN, and

MERCOSUR). Regional marketing corresponds to Perlmutter‟s (1969) concept of

regiocentric management: each region is considered as a unique market opportunity.

Pan-regional Marketing: These multicountry trade regions began to be progressively

integrated via common trade customs protocol (Customs Union), low and equivalent trade-

barriers (Common Market), international transfer of labor and assets (Economic Unions),

common currency (Monetary Union), and common economic and defense policy (Political

Union) – a phenomenon that was called Pan-regional Marketing. Thus, some contend that the

Latin American market is pan-regional market and that a marketing strategy aimed at the

overall Latin American region will be more effective than a strategy targeted to each of the

Latin American countries (e.g., Johansson 1997). A similar argument is made for the Pan-

European or the EU markets (Halliburton and Jones 1993). Pan-regional marketing obtains

and services demand abroad with product-mix and marketing mix strategies coordinated to

target large regions of countries.

Internet Marketing: A still more recent phenomenon that involves aspects of domestic,

foreign, transnational and global marketing is Internet Marketing. The Internet is a gigantic

global mall that shelters all websites or “online retail outlets” of the world. The Web is a vast

collection of interconnected documents stored on computers (called “hosts”) all around the

world that is linked to the Internet (Hoffman and Novak 1996). Any company that uses the

Internet automatically has a global supply presence. A typical homepage describes the main

purpose and features of the website that provides an interactive table of contents that is a

navigation scheme for the website. These doors lead to other doors that lead to other doors

connecting to documents all over the world, and so on. It is a maze, and hence its name the

www. But it is a retail maze, a virtual global market mall.

Marketing Strategies that Focus both on Production and Marketing:

Production Abroad for Domestic Markets: The domestic firm gets more and more

internationalized at this stage and begins to produce abroad. During the two decades after

World War II, while the rest of war-torn world was reconstructing its nations, multinational

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companies began to make massive U. S. foreign direct investments [USFDI] abroad to form

wholly owned subsidiaries, branches and affiliates. During its earlier stages, the primary

purpose of USFDI was to produce products and services for U. S. domestic markets – a

phenomenon we call as Production Abroad for Domestic Markets. During later stages,

products and services of USFDI were also marketed abroad, and this phenomenon is called

International Marketing.

International Marketing: This stage is an extension and combination of foreign marketing and

production abroad for domestic markets. It follows the third stage of the international product

cycle (IPC). The Third World countries or the newly industrialized countries (NICs) develop

their own manufacturing capability, helped by the technology transfers from and alliances

with the home country. As low-cost but high-quality production gets developed in these

countries, the home country imports the products that it had originally innovated back home,

thus completing the IPC (Wells 1968). As many other countries other than U.S.A. begin to

invent and produce new products and processes, home (e.g., U. S. A.) countries begin to

strike joint ventures with them with majority to minority local participation. The IPC theory

gets revised to include this phenomenon (see Vernon 1979). The home country that started

production of a given innovative product, however, may still continue as the foremost

manufacturing site (Vernon 1979). This is particularly true in the case of computers and other

high-tech products (Porter 1990).

Multinational marketing further expands international marketing. The focus of multinational

marketing came as a result of the development of the multinational corporation (Jeannet and

Hennessey 1998:5). Multinational companies are those that have significant (say, over 30%)

shares of foreign sales, operating profits, number of employees abroad, foreign assets, or

combinations of any of these variables (Shaked 1986; Quian 1998). Multinational marketing

companies expand their participation in foreign markets and integrate their marketing efforts

in various host countries (Yip 1995). During this stage foreign multinationals begin to invest

heavily in the United States. Massive USFDI abroad invites enormous reverse foreign direct

investments [RFDI] in the U. S., thus increasing interdependence between countries and

economies (Kujawa 1986).

Multidomestic Marketing: The term multidomestic was first proposed by Hout, Porter and

Rudden (1982) in the context of industries and not strategies (Yip 1995). Multidomestic

markets are defined as product markets in which local consumers have preferences and

functional requirements widely different from those of other markets or countries (Johansson

2000). It is running different businesses in a number of countries, and hence the term “multi-

domestic,” each subsidiary represents a separate business that must be run profitably (Jeannet

and Hennessey 1998: 288). Multidomestic Marketing strategies compete with many

strategies, each one tailored to a particular local market (Jeannet and Hennessey 1998;

Keegan 1999). Hence, Yip suggests the term “multilocal” rather than multidomestic to

describe these strategies (Yip 1995: 24). Perlmutter (1969) would describe this strategy as

“polycentric,” that is, each country is a unique market center.

Marketing Strategies that integrate all major Business Functions

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Transnational Marketing is an extension of multinational marketing, and as such, follows

transnational firms. Transnational firms are stateless corporations that are global in

operations. Bartlett and Goshal (1989) first proposed the term “transnational organizations”

for emphasizing their cross-country management-production-marketing network. No country

has a majority control in equity, top management, corporate mission and policy (Wendt

1993). Some of the top 50 Fortune Global Companies may be truly transnational in this sense

(e.g., GM, Ford, Toyota, IBM, GE, Unilever, and Exxon).

Global Marketing: Currently pan-regional marketing and transnational marketing are

evolving into Global Marketing. Global Marketing is targeting homogenous markets in

several countries [e.g., the triad of North America, Western Europe and Japan] with

standardized products and globalized marketing programs (Buzzell 1968; Levitt 1983).

Global Marketing philosophy is “thinking globally but acting locally” (Ohmae 1985). Global

Marketing involves many activities: global supplies, global financing, global human

resources, global advertising and promotions, global technological alliances, global

production, global sourcing, global standardization of the product mix, globalization of the

marketing mix, global transactions via global currencies, global markets and global Internet

marketing. The domestic company may develop a core product mix and marketing mix

strategy, but it soon globalizes by integrating it across almost all countries of the world (Yip

1995).

Table 1 sketches this evolution. Historically the first eight strategies, domestic, multicultural,

export/import, foreign/regional, pan-regional and Internet marketing have focused primarily

on the marketing function. The next four, production abroad for domestic markets,

international, multinational and multi-domestic marketing strategies and institutions have

primarily focused on both production and marketing. The final two, transnational and global

marketing strategies, are currently focusing on global integrated the management of

purchasing, process, production and marketing functions. As is evident from this

evolutionary analysis (see also Table 1), global marketing, by definition includes all strategies

and institutions from domestic to global marketing, and hence, may be considered as the

generalization of all other marketing strategies and institutions (Bartels 1968; Mascarenhas

1978). Ethics of global marketing, accordingly, is comprehensive and must include all the

ethical imperatives of domestic to global marketing strategies and institutions.

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TABLE 1: CLASSIFICATION OF DOMESTIC AND NON-DOMESTIC

MARKETING STRATEGIES

Marketing Strategy &

Institution

Foreign Content1

(FC)

Domestic Control

(DC)

Basic Strategy

Primary Focus: Marketing

Domestic

Marketing

FC: Low

DC: High

Home produced products and services for home use.

Marketing for a single market.

Multicultural

Marketing

FC: Low

DC: High

Home produced products and services adapted to

domestic mlticultures. Promotions are dovetailed to

cultural market sensitivities.

Export/Import

Marketing

FC: Growing

DC: Growing

Given saturated domestic markets, market penetration

abroad is necessary (export mktg); Import finished

products for domestic markets and components and

parts for better scale economies.

Foreign/Regional

Marketing

FC: Medium

DC: Medium

Marketing in foreign countries via local branches,

brokers, channels and media (foreign mktg).

Marketing by regions and for regions (regional mktg)

Pan-Regional

Marketing

FC: Medium

DC: Medium

Marketing in multicountry trade regions that are

integrated as common markets, economic unions,

monetary unions or political unions.

Internet Marketing FC: Medium

DC: Medium

Online marketing of products and sources that is 24/7

and global.

Primary Focus: Production and Marketing

Production abroad for

Domestic Marketing

FC: Medium

DC: Medium

Manufacturing abroad for domestic markets.

Creation of wholly owned subsidiaries, affiliates,

branches and other joint ventures.

International

Marketing

FC: Medium

DC: Medium

Production abroad for domestic and foreign markets.

Multinational

Marketing

FC: Majority

DC: Minority

Marketing by multinational companies that have

significant equity and control from many countries.

Multidomestic

Home Marketing

FC: Majority

DC: Minority

Multiple businesses targeting multiple country markets

by the home country or host country multinational

corporations.

Primary Focus: Global Management, Production and Marketing

Transnational

Marketing

FC: Majority

DC: Minority

Giant stateless corporations with equal equity and

control spread across nations optimizing management,

production and marketing functions.

Global Marketing FC: Majority

DC: Minority

Targeting homogenous markets in several countries via

global supply, skills, finance, logistics, distribution and

promotions management.

1 Foreign Content may be measured as percentage of Company‟s sales revenue, operating

profits, assets, and employees coming from non-domestic operations (Quian 1998). Domestic

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(foreign) control may be assessed by home (host) country control of any or all of the money,

supply, skills, logistics, production, trade and promotions operations.

Also, our analysis of domestic to global marketing strategies and institutions, unravels several

interesting phenomena: a) foreign content of companies (measured by the percentage

revenues, assets, manpower, equity, skills, technology that comes from non-domestic

operations) keeps increasing and proportionately, domestic content decreases; b)

consequently, the domain of non-domestic or foreign control keeps increasing while domestic

control decreases (see Table 1); c) flowing from (a) and (b) are other concomitant phenomena

such as: c) stakeholders increase by number, types and ubiquity from domestic to global

strategies as the domains of operations increase; d) especially, as global marketing spreads to

third world countries, the number of vulnerable stakeholder communities keeps increasing,

and e) consequently, global income and opportunity inequalities between home and host

countries begin to widen. All these phenomena have distributive justice ethical implications

that we investigate in the next section.

THE THEORY OF DISTRIBUTIVE JUSTICE AND ITS

RELEVANCE TO GLOBAL MARKETING

Ethical scholars distinguish at least three primary positions when evaluating moral rectitude

of decisions, actions, and institutions (Beauchamp and Bowie 1993; Frankena 1973). Applied

to assess the ethics of domestic to global marketing systems, the three ethical theories are:

TELEOLOGY: this position maintains that the moral correctness of all marketing actions is

primarily determined by their consequences. For example, to the question what makes a

domestic or global marketing strategy or institution teleologically just, a teleologist would

argue

that this strategy should bring more advantages over disadvantages to the greatest number of

stakeholders.

DEONTOLOGY: this position holds that the moral appropriateness of all strategies and

institutions primarily determined by certain principles, rules, rights and duties of the subjects

involved. To the question what renders a domestic to global marketing strategy or institution

deontologically just, deontologists would argue that it should uphold the moral rights and

duties

of all stakeholders involved.

DISTRIBUTIVE JUSTICE: this position affirms that the morality of some actions is

dependent

upon how the costs and benefits, rights and duties of these actions are distributed among its

many stakeholders. To the question what assures a domestic to global marketing strategy or

institution distributively just, the advocates of distributive justice would argue that the said

strategy or institution should ensure that the rights and duties, costs and benefits involved

should

be equitably spread across all stakeholders affected by that strategy or institution.

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Marketing ethics literature has regularly invoked teleology (as utilitarianism or

consequentialism) and deontology (as right/duty or norms based reasoning), in analyzing

ethical decision-making process in marketing (e.g., Ferrell and Gresham 1985; Hunt and

Vitell 1986; Laczniak 1983; Reidenbach and Robin 1990). More recently, a third moral

system, justice in general, or distributive justice in particular, has also been included (e.g.,

Ferrell, Gresham, and Fraedrich 1989; Laczniak and Murphy 1993; Mascarenhas 1990, 1991,

1995; Reidenbach, Robin, and Dawson 1991; Robin and Reidenbach 1993). This paper

argues for a more explicit and comprehensive inclusion of distributive justice considerations

in the ethical assessment of domestic to global marketing strategies and institutions.

Justice is commonly defined as giving unto others what rightfully belongs to them (Rawls

1971). Justice, therefore, has both deontological and teleological aspects. The theory of

distributive justice is particularly relevant when different people put forth conflicting claims

on society's rights and duties, benefits and burdens and when all claims cannot be equitably

satisfied. In such cases, the standards of justice are generally taken more seriously than

utilitarian considerations (Hare 1978; Rawls 1958). The moral right to be treated as free and

equal persons is the basic foundation of distributive justice (Vlastos 1962). For instance,

target marketing to vulnerable minorities, charging exorbitant premium prices on new drug

introductions, and by using coercive channel power against competing products in retail

stores are marketing strategies that may be productive and profitable (and hence justifiable on

utilitarian grounds). Additionally, they may not explicitly violate consumer rights or duties

(and hence justifiable on deontological grounds). But in as much as these marketing

strategies distribute costs and burdens, rights and duties, unevenly across various global

stakeholders such as customers, clients, consumers, competitors, and channel members, they

violate global distributive justice.

The theory of justice distinguishes three classic forms of justice or fairness, depending upon

the specific moral rule or standard used: a) distributive justice deals with an equitable

distribution of benefits and burdens, and states that equals should be treated equally and

unequals, unequally; b) retributive justice maintains that one should adequately reward a

person for right done and punish (blame) for wrong perpetrated; c) compensatory justice

affirms that one should compensate the wronged person for the wrong done by restoring the

person to his or her original position. Compensatory and retributive justices are subsets of

distributive justice since there are basically concerned with correcting wrongs using the

distributive justice rule (Boatright 2005). All three forms are subsets of a largest system:

corrective justice. Global marketing ethics involves the whole world of resources, skills,

markets and opportunities and thus challenges all three forms of corrective justice:

distributive, retributive and compensatory.

Distributive justice looks at two important factors (Ryan 1942): what is distributed, and how

it is distributed. What is distributed (e.g., product information, healthcare) "must itself be

generated by production, whether one produces agricultural products, manufactured goods

and commodities, or services" (Ryan 1942:181). One's share of what is distributed may

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depend upon various modes or canons of distributive justice: a) canon of equality based on

egalitarian justice; b) canon of need (socialist justice); c) canon of merit (naturalist justice); d)

canon of effort (retributive justice); e) canon of productivity (capitalist justice); f) canon of

common good (social libertarianism), and g) canon of supply demand (individual

libertarianism). Egalitarianism emphasizes equal access to the goods of life that every

rational person desires based on need and equality. Libertarianism focuses on equal access to

social and economic liberty and invokes fair procedures and free-market systems rather than

substantive outcomes. Naturalist Justice rewards one's innate merit or ability. Since global

marketing relates to the distribution of global purchasing and production, global products,

brands and services, what and how it is distributed becomes the scope of global marketing

ethics.

Distributive justice relates both to individuals (individual justice) or groups or societies

(social justice). Each aspect of distributive justice involves several theories, rules or

principles formulated by different philosophers of distributive justice.

TABLE 2: A TAXONOMY OF DISTRIBUTIVE JUSTICE PRINCIPLES

Generic

Justice

First

Basic

Division

Second Basic

Division: Sub

theories of

Justice

Basic Underlying

Principle

Global Marketing Ethical

Imperative

Distri-

butive

Justice

Individual

Justice

Retributive or

punitive justice

Quid pro quo:

principle of

retaliation

Institute just punitive

damages for offending

global marketing practices

Compensatory

justice

Restore the

harmed person to

one’s original

status

Compensate damages for

stakeholders adversely

affected by global products

and brands

Commutative

Justice

Distribute to each

one by one’s

deserves

Organize global equitable

distribution of quality

products, brands, services at

equitable prices

Rights/Duty or

deontological

Justice

Distribute to each

one by one’s rights

and fulfilled duties

Global marketing should

uphold rights/duties of

global citizens and

customers

Entitlement

Justice

Nozick’s

Principle:

distribute to each

one by one’s

entitlement

Minimally, global marketing

should distribute costs and

benefits by customer merits,

efforts and contribution

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Cost-benefit or

Utilitarian

Justice

Distribute such

that benefits

exceed costs for

each one

Global marketing strategies

should act such that net

benefits accrue to the

greatest number of global

stakeholders.

Social

Justice

Liability

Justice

Distribute such

that all harm is

avoided

Global marketing should not

harm anyone in the world

Protective

Justice

Distribution

should protect all

people from

current harm


protect every stakeholder in

the world

Preemptive

Justice

Distribution

should prevent all

people from

future harm


prevent harm to all its

global stakeholders.

Procedural

Justice

Distribution set up

procedures to

avoid all harm

If harmed, global marketing

should establish due process

for stakeholder redress.

Egalitarian

Justice

Distribution

should be equal

for all


eventually bring about

global equality in

opportunity and prosperity

Aristotle’s

Minimum

Justice

Distribute equally

among equals but

unequally among

unequals

Global marketing should at

least maintain equality

among equals and justifiable

inequality among unequals.

Rawls First

Principle of

Egalitarian

Justice

Distribution

should not merit

undeserved

advantages of

people

Global marketing

distribution should not favor

undeserved advantages of

color, lineage, ethnicity or

religion,

Rawls Second

Principle of

Egalitarian

Justice

Distribution

should nullify

undeserved

disadvantages of

people


progressively nullify

disadvantages of color,

creed, gender or nationality

Beneficent

Justice

Distribution

should promote

good of all people


promote the good of all its

stakeholders.

Table 2 categorizes some of them that have relevance to global marketing. For the sake of

brevity, we only state these principles, illustrating them by examples but without discussing

them in detail. [Such details may be found, for example, in Bowie 1971, Deutsch 1985,

Frankena 1973, Rawls 1971, Rescher 1966, and Ryan 1942].

ETHICAL IMPERATIVES OF GLOBAL MARKETING STRATEGIES AND

INSTITUTIONS

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Marketing strategies and institutions, from domestic to global, involve markets of individuals

and groups, countries and regions. Marketing impacts people, good or bad, rightly or

wrongly, justly or unjustly. Thus, an overarching normative ethical theory that can best deal

with domestic to global marketing strategies and institutions is the theory of justice, in

general, and the theory of distributive justice, in particular. Normative ethical theory is the

reasoning process that one uses to justify the moral goodness or ethics of judgments, actions

or institutions. We apply the theory of distributive justice in order to identify and understand

ethical responsibilities of domestic to global marketing institutions...

Global Marketing Ethics of Strategies that Focus on Marketing

Since global marketing is a generalization of the domestic (see Bartels 1968; Mascarenhas

1978), that is, since the various strategies and institutions from domestic to non-domestic

marketing are contained in global marketing, our ethical discussion of global marketing must

include all strategies and institutions of domestic to global marketing. Our first normative

proposition is:

P1: Global marketing as a generalized version of domestic marketing must be guided by

domestic marketing ethical principles.

All the ethical theories, principles and imperative of individual and social distributive justice

listed in Table 2 apply to each strategy and institution of domestic marketing. For instance,

offending manufacturers and marketers are liable for retributive justice while wronged

customers are entitled for compensatory justice through proper consumer redress (Andreasen

1988). Artificial shortages, domestic or international, in distribution violate distributive

utilitarian justice and can particularly affect the poor (Alwitt 1995; Caplovitz 1963), the

ghettos (Sturdivant 1969) or the disadvantaged ethnic groups (Andreasen 1975, 1982).

Machiavellianism (Hunt and Chonko 1984) violates one‟s entitlement justice. All forms of

market greed and avarice that infect some domestic marketing practices such as predatory

pricing (Gundlach 1995; Sheffet 1994), seductive marketing (Deighton and Grayson 1995)

and easy credit granting (Faber and O‟Guinn 1988; Feinberg 1986) could easily slip

intoMachiavellianism. Persuasive advertising that leads to compulsive eating, smoking,

gambling and other addictions are violations of individual and social distributive justice

especially when such promotions target vulnerable consumer groups such as children,

teenagers and the elderly (see Andrews et al. 2004; Beauchamp 1983; Faber and O‟Guinn

1988; Faber et al. 1995).

The market does not treat all consumers fairly. The classic theory of price discrimination that

tries to maximize revenues by charging each customer the highest price one is willing to pay

may safeguard Nozick‟s theory of entitlement justice but violate Rawls theory of egalitarian

justice (see Kamen 1992; Maynes 1990). Pricing strategies such as price fixing, predatory

pricing, and bait-pricing are basically violations of commutative and procedural distributive

justice (Sheffet 1994). Prices based on value-in-use have been criticized as unfair and

violates protective and preemptive distributive justice (e.g., drug AZT). Over-pricing ghetto

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or inner city poor consumers compared to urban and higher income classes has been regularly

documented (e.g., Alwitt 1995; Andreasen 1975; Caplovitz 1963; Goodman 1968; Hudson

1993; New York Department of Consumer Affairs (NYDCA) 1992; Sturdivant 1969).

Redlining (a process by which goods or services are made unavailable, or made available on

less than favorable terms, to people because of race, color, creed, or nationality) violates

deontological distributive justice (Purviance 1993; Trout 1993).

Our second normative proposition is:

P2: Global marketing includes and affects cultures of the world and, therefore, must be guided

by ethical principles of global multicultural marketing.

Global marketing incorporates multicultural marketing. When there are several distinct

cultures within and between domestic markets, then new products may have to be streamlined

to respond to cultural and semi-cultural sensitivities (Terpstra and David 1991). Multicultural

marketing has social distributive justice implications. To be multi-culturally responsive to

ethnic, religious and national sensitivities is a distributive social justice mandate of

multicultural marketing. Conversely, effectively managing cultural differences (Harris and

Moran 2000) can be a virtue. Multicultural marketing should not disparage nor denigrate

ethnic cultures (this violates liability justice), but, instead, it must protect them (protective

justice) and prevent them from wasteful erosions (preemptive justice). At the same time,

multicultural marketing should not foster cultural hegemony and superiority (as in

ethnocentric marketing) for this would violate egalitarian justice, specifically expressed in

Rawls (1971) Principle of Egalitarian Justice (see Table 1).

A just society is not necessarily one in which all are equal, but one in which inequalities are

justifiable. Rawls (1971) proposed two principles of distributive justice to defend equality

and inequality: 1) The Equality Principle (Libertarian Fair Opportunism): where each person

engaged in an institution or affected by it has an equal right to the most extensive liberty

compatible with a like liberty for all; equality is the impartial and equitable administration

and application of rules which define a practice; 2) The Difference Principle (Libertarian

Egalitarianism): where inequalities as defined by the institutional structure or fostered by it

are arbitrary unless they work out to everyone's advantage and provided that the positions and

offices are open to all. The first principle requires basic equal liberty for all. The second

principle admits existing inequalities and differences, if a) they work to the advantage of all,

and b) if the social system offers equal opportunity for all to combat or compensate for these

differences. Peoples of different cultures (based on nationality, ethnicity and religiosity) have

an equal right to the most extensive liberty compatible with like liberty all. Multicultural

marketing must safeguard Rawls (1971) Equality Principle.

Our third normative proposition is:

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P3: Global marketing includes export, import, foreign and regional, pan-regional, Internet and

global Internet marketing and must be guided by the marketing ethical principles of the latter

institutions.

Global marketing subsumes import and export marketing. Ethics of import and export

marketing specifically relates to distributive justice in relation to individual suppliers or

groups of distributors. Using one‟s centralized purchasing power to renege extant contracts

(e.g., see GM‟s case in Webster 1995), not to honor agreed on demand quotas (e.g., see the

case of Ford in Narayandas and Rangan 2004) or to engage in sweatshops (Hartman, Arnold

and Wokutch 2003), are some of the import marketing practices that violate individual and

social distributive justice.

In a seller‟s market, the exporter enjoys a quasi-monopolistic position and can engage in

competitive negotiating behavior to optimize trade margins (Dabholkar, Johnston and Cathey

1994). On the contrary, in a buyer‟s market, the importer can assume an aggressive

bargaining position and influence contract terms. In such situations, the exporting firm has

weak price-bargaining and negotiating control (Perdue and Summers 1991) and may transit to

foreign marketing to obtain better control. Ethical principles of protective, preemptive and

procedural distributive justice mandate equitable distribution of control among the export

marketing partners such that monopolies and monopsonies are discouraged.

Also, when export marketing transits to foreign marketing, the firm is increasingly export-

dependent, gathers much information on export countries through market intelligence, and

formulates long-term exporting strategies with several long exporter-importer negotiations.

There is more customer orientation at this stage and more cooperative behavior (Dabholkar,

Johnston, and Cathey 1994), more coordinative problem-solving behavior, a negotiation

posture aimed at maximizing joint benefits and rooted in extensive information sharing

(Ganesan 1993). There is greater interdependency between the exporting and the importing

firms (Frazier and Summers 1984). Export, foreign and/or global marketing encourage and

support utilitarian and deontological distributive justice responsibilities that develop long-

term supplier-buyer relationships, respect interdependencies and administering all exchanges

with fairness and equity.

Regional Marketing includes export marketing and foreign marketing that penetrates an entire

trade region (e.g., NAFTA, LAFTA, MERCOSUR, and ASEAN) or trade regions (e.g., EU,

Pacific Rim Countries, and WTO). Regional marketing extends the ethical imperatives of

export, import and foreign marketing, since stakeholders increase by types, numbers and

ubiquity. Hence, utilitarian distributive justice principles apply.

Currently, several tariff and non-tariff trade barriers are falling, larger continental trade

regions have emerged, markets have globalized, and even consumer needs and wants have

converged globally (Levitt 1983; Ohmae 1990). Global market share, beyond domestic

market share, is becoming a determinant in the areas of product design and development, core

and end product manufacturing, brand and trademark development, competence and licenses

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pooling and formats and standards development (Ohmae 1979; Prahalad 1995). The more

that world trade is liberalized, the higher are the commutative, deontological and utilitarian

distributive justice responsibilities of global marketing.

Export, foreign and regional marketing strategies and institutions, moreover, have specific

ethical imperatives of distributive justice. All these forms of marketing imply some form of

mutually agreed upon contracts, written or unwritten, formal or informal. A contract between

two or more parties is valid if all the parties have full knowledge of the terms of the contract

that is properly represented to them, if they are free to become parties to it, and if the contract

is not for an unethical or immoral act. Human freedom is expanded by the recognition of

contractual rights and duties (Rawls 1971). A person has a duty to honor one's contracts, and

thus treat the other contracting parties as an end, and not as means to an end; failing to honor

one's contract is a practice that cannot be universalized (Kant 1964). Most contracts bind

under industry laws. Contractualism is a subset of deontological distributive justice.

Contractualism is a theory of social contract which maintains that the ultimate determinant of

the structure and performance of any strategy or institution is a set of reciprocal,

institutionalized duties and obligations which are broadly accepted by its citizens. More

recently, Donaldson and Dunfee (1994) have synthesized both normative and empirical

ethical decision and assessment approaches under contract-based norms and principles.

Corporations are socially responsible because of their social contract with justice behavior

and society; that is, they should constrain self-enhancement to allow society to act and grow

collectively (Dunfee 1999; Walster, Walster, and Berscheid 1978). These are the minimal

demands of contractarian justice which is a form of distributive justice.

Pan-Regional Marketing: Is a cost-effectiveness-based adjustment of multidomestic

strategies. The participating multinationals coming from the same major trade region or

serving the same trade region began to formulate production and marketing strategies that

would serve the entire trade region rather than each country within it. This is macro

multicultural marketing. The full value-chain could occur anywhere in the region where there

are better opportunities for cost containment, quality enhancement, and regional participation.

If the product sold transcends regional cultures, then pan-regional distribution, promotions,

advertising and retailing is in order (as in the case if Burger King in Latin America; see

Rosenberg (1993), and IBM in Latin America (Barks 1994)0. Global marketing utilitarian and

deontological justice imperatives must enable local actors to share in the creation and sharing

of the full-value chain that pan-regional marketing implies.

Internet Marketing and Global Internet Marketing: are the production and marketing of

various electronic products and services, and the marketing of all other products and services

to all the countries and markets of the world through the global network of computers,

laptops, servers, data warehouses, and other backbone network infrastructure (Kleindl 2003;

Turban et al. 2000). Internet marketing involves specific mandates of safeguarding consumer

privacy (Mascarenhas, Kesavan and Bernacchi 2003), eliminating consumer piracy, consumer

cyberfraud, merchant cyberfraud, cyber hacking, and infringement of intellectual property

rights. Minimally, these are the imperatives of liability, protective and preemptive justice.

166

Global Marketing Ethics of Strategies that Focus on Production and Marketing

A marketing strategy that includes production strategy chooses foreign markets that are good

sources of minerals and materials, skills and manpower, land and capital, stable hard

currency, high buying power and stable markets, low competition, and attractive political

incentives (Terpstra and Russow 2000). We distinguish five major production-marketing

strategies: a) Production abroad for domestic markets; b) International marketing; c)

Multinational marketing; d) Multidomestic marketing and e) and Panregional marketing. Our

fourth normative proposition in this regard is:

P4: Global marketing includes production abroad for domestic marketing, international,

multinational and multidomestic and, therefore, must be guided by the marketing ethical

principles of these respective strategies and institutions.

Production abroad for domestic marketing – this was pioneered by U. S. firms that invested

heavily abroad (via FDI: foreign direct investments) primarily for producing products that

would be sold in the U. S. markets. In turn, foreign countries (e.g., Japan, U.K., Netherlands)

have also invested heavily in the U. S. (via RFDI: reverse foreign direct investments) but with

the primary purpose of entering and capturing the US market. Ethical responsibilities include

those of domestic marketing as applicable abroad where production is organized. Specific

ethical responsibilities minimally include: a) protecting human rights of labor abroad and

refrain from hiring underage children (the International Labor Organization (ILO) estimates

that in developing nations 250 million children between the ages of 5 and 14 are working,

almost half working full time; close to a billion children ages 14-18 are working (see

Hartman, Arnold and Wokutch 2003: xix; b) avoiding sweatshops that involve 90-hour weeks

in subhuman working conditions (Hartman, Arnold and Wokutch 2003); c) honoring labor

contracts of one‟s employees with contractarian justice, and d) protecting the environment

where production takes place (Ruland 2002). For instance, Levi Strauss & Co. withdrew

production of denims from China in 1993 despite its strong market for over a billion denims

just because worker rights were seriously violated there (Davids 1999).

International Marketing: goes beyond export and foreign marketing, and streamlines ideation,

product designs, prototyping, fabricating, manufacturing, testing, pre-marketing, and the

marketing of products and services both at home and in host countries taking into full account

local markets, local cultures and environments, local laws and governments and local tariffs

and customs (Cateora 1993). Major ethical responsibilities include: host country production

(i.e., domestic production is now extended to several host countries for scale economies, local

development opportunity, and local stakeholder participation), international purchasing of

materials, international employment of skills, international investor participation and host

country advertising agencies and promotional tools. An important ethical challenge for the

international marketing manager is to understand and respect the political, cultural, and

economic environments of the host countries while dovetail inginternational production and

167

marketing to environmental responsibilities (Cateora 1993). All the theories, principles and

imperatives of social distributive justice (see Table 1) apply here.

Multinational marketing: Multinational marketing is marketing by multinational companies

in several foreign countries with the entire value chain of products, production,

advertisements, promotions, distribution networks and financing adapted to local stakeholder

needs and wants, cultures and political climate (Keegan 1999). The primary focus is cost

containment, creating value, sustained competitive advantage (SCA) and re-exporting to

maximize domestic and foreign market shares. All domestic and foreign marketing ethical

responsibilities apply here.

Multidomestic Marketing: Is a sequel to multinational marketing. In general, a very large

percentage of sales and profits of these multidomestic firms are generated overseas. In their

early stages of development, multinational companies operate in a number of countries or

markets as if they were local companies with strong local preferences (Kogut and Zander

1993), a phenomenon that eventually was called multidomestic marketing. The distinction

between home and host begins to fade as all participating nations are “home” or “domestic”

and several domestic strategies each one tailored to one‟s local market are created (Jeannet

and Hennessey 2000). “While some key strategic decisions with respect to product and

technology are made at the central or head office, the initiative of implementing marketing

strategies is left largely to local-country subsidiaries” (Jeannet and Hennessey 1998: 287).

Local operating managers, presumably much more attuned to local market needs, are given

the freedom and ethical responsibility to develop marketing strategies tailored to local needs.

Technology transfers occur at this stage and care should be taken that these transfers

contribute to the development of host countries.

Typical products of multidomestic or multilocal marketing strategies reflect specific religious,

cultural and social values such as apparel that includes shoe-wear and jewelry, food and

beverages, insurance and financial services, and movies and entertainment (Johansson 1997).

The focus is on market segmentation strategies that satisfy different markets either within a

country or across countries. When this strategy functions within a country, the phenomenon

is best designated as multicultural, and when this strategy is targeted across countries, it is

multidomestic. Global marketing ethical imperatives should respect and reflect local

religious, cultural and social values rather than disparage them.

Global Marketing Ethics for Strategies that Focus on Management,

Production and Marketing:

When management competencies, core competencies, core products, production and content

of products and services, and corresponding marketing skills begin to migrate to countries,

continents and the globe, there emerge different genera of non-domestic marketing.

Currently, we can distinguish two: transnational marketing and global marketing. Our fifth

normative proposition in this regard is:

168

P5: Global marketing as including transnational and global marketing should be guided by the

marketing ethical principles of these institutions.

Transnational Marketing follows the emergence of transnational corporations whose

ownership, equity control, core competencies and products, production and marketing bases

are so spread across various countries that no nation can claim the corporation as its own.

Neither single home nor host country controls major product and marketing mix strategies

(Bannister, Braga and Petry 1994), and as a consequence, corporate headquarters and core

management are volatile moving from country to country (Miller 1992). No particular

national status is important; most operations are metanational (Doz and Asakawa 1997). The

center of expertise, ownership, power, control and operations may reside anywhere they best

reside (Bluemenstein 1997); there are no German nor American companies, only “successful

ones”(White 1998). When no country can officially control nor legally bind transnational

companies, some countries can ensure that the codes of conduct and environmental laws that

apply in developed countries are applied when functioning in the developing nations

(Aaronson 2005; Davids 1999; Logsdon and Wood 2005).Global marketing ethical

imperatives should respect and develop transnational values and environments rather than be

ethnocentric or foster home country value hegemony. All the theories, principles and

imperatives of social distributive justice (see Table 1) particularly apply here.

Global Marketing: is a sequel to transnational marketing; the sphere and center of all

activities is global (Jeannet and Hennessey 2000; Keegan 1998; Keegan and Green 2003); it

is a geocentric organization (Perlmutter 1969). For instance, the Caux Principles suggest the

following concrete global responsibilities for the corporate executives of global corporations:

1) The Responsibilities of Businesses: Beyond shareholders toward stakeholders. 2) The

Economic and Social Impact of Businesses: Innovation, justice and world community. 3)

Business Behavior: Beyond the letter of law toward a spirit of trust. 4) Respect for rules that

promote free trade, competition and fair treatment of all. 5) Support and liberalize

multinational trade systems (e.g., GATT, WTO). 6) Respect for environment: protect,

improve and develop environment and 7) Avoidance of Illicit operations: avoid and eliminate

bribery, money laundering and other corrupt (e.g., terrorism, drug-traffic) business practices.

Specifically, global marketing whose domain is the entire resource base of the world, should

bring about equality of opportunity to basic human rights in general such as freedom (Nielsen

1985), justice (Nielsen 1979) and to specific needs such as healthcare (e.g., Calmen 1994;

Outka 1987), lifesaving drugs (Mascarenhas, Kesavan and Bernacchi 2005c), donor organs

(Purviance 1993), and the like. The basic ethical imperative of global production and

marketing should be the progressive reduction of global inequalities of income and

opportunity (Mascarenhas, Kesavan and Bernacchi 2005 b) and working towards global

prosperity. In this regard, even the poor can be profitable for global corporations (Prahalad

2004). By domain and definition, global marketing ethics should also include the

demarketing of drugs and tobacco (e.g., Andrews et al. 2004), pornography, gambling and the

like products.

169

With an effective combination of regional, pan-regional and Internet marketing strategies and

global marketing results the phenomenon of Global Internet Marketing. For instance, over

the last eight years (i.e. 1994-2002), the Internet has evolved from a mere communications

medium to a global epicenter of technological transformation in business models and

processes. Businesses are adapting new IT technologies to improve their management,

purchasing, production, and marketing strategies. New technologies include the Internet,

WWW, Extranets, Intranets, databases, enterprise resource management (e-ERM), supply

chain management (e-SCM), customer relationship management (e-CRM), and mass

customization software (Kleindl 2003). Currently, all over the world, over 900 million

computers are connected to the Internet, with over a billion users, and the WWW has over 60

million websites (Kleindl 2003). The monthly Internet user rates are still growing in double

digits; the user numbers are projected to reach a billion by the end of 2003 (Bidgoli 2002).

Current global Internet marketing institutions include eBay, Amazon.com, Yahoo.com,

Google.com and Dell.com. The ethical imperatives of traditional brick-and-mortar global

marketing institutions should also apply to global Internet marketing institutions.

CONCLUSIONS

Justice commonly defined as giving to others what rightfully belongs to them (Rawls 1971),

plays a major role in all areas of human exchange and interaction and particularly in

marketing exchanges (Reidenbach, Robin, and Dawson 1991; Robin and Reidenbach 1993).

Justice becomes an issue whenever a distribution or exchange is made, regardless of what is

being distributed (e.g., goods, services, resources, benefits or costs, rights or duties, rewards

or punishment). Since most marketing activities involve distributions and exchanges, justice

pervades virtually all domains of marketing. Marketing is determined by relationships in

which power is unevenly distributed between stakeholders that can often be detrimental to

different publics (Robin and Reidenbach 1993:100). Such inequitable relationships need to

be specifically addressed by distributive justice principles (Robin and Reidenbach 1993).

Exchange as distribution is a basic concept in marketing and works very well as long as each

party to an exchange has something the other party values, and if both parties are on an even

playing field. But the exchange concept becomes problematic when some party to an

exchange (e.g., the poor, the children, the elderly, the minorities, the poor countries) does not

have something (e.g., money, resources, advantage, skills, information, opportunity) the other

party values or is burdened with undeserved social disadvantages. Under these circumstances

the marketing exchange is generally imbalanced in favor of the marketers (Alwitt 1995;

Andreasen 1975, 1993, 1995; Ringold 1995).

In the arena of global marketing, some consumers are naturally disadvantaged based on race,

color, gender, geography and nationality (Andreasen 1975), and hence, are vulnerable

(Andreasen 1988; Andreasen and Manning 1990). The moral right to be treated as free and

equal persons is the basic foundation of distributive justice (Vlastos 1962). For example,

target-marketing to vulnerable minorities or using coercive channel power against competing

170

products in retail stores are marketing strategies that may be productive and profitable, and

hence they are justifiable on utilitarian grounds. They may not explicitly violate consumer

rights or duties, and hence, they are justified on deontological grounds. But in as much as

they unevenly distribute costs and burdens, rights and duties across various stakeholders such

as consumers and local communities, competitors and channel members, they violate

distributive justice.

Global marketing Ethics as a Challenge to Global Prosperity

With the crumbling of the Berlin Wall, the fall of Communism, the dissolution of U. S. S. R.,

the demise of the command economies in general, and the enormous advances in

communication and transportation technologies, the world is progressively changing. It is

becoming a giant customs union (Jeannet and Hennessey 1998), a mega common market

(Levitt 1983; Ohmae 1990), a global economic union (Czinkota and Ronkainen 1995), a

virtual Eurodollar monetary union (Keegan 1995), and possibly, a political union during the

early Third Millennium (Jeannet and Hennessey 1998). With all these movements global

business ethical responsibilities in general and global marketing ethical responsibilities in

particular, increase.

The Preamble to the Caux Principles suggests that global markets and globalization of

markets imply the following: a) the increasing mobility of employment, capital, produce and

technology across countries and trade regions; b) current international laws and market forces

are necessary but insufficient guides for business conduct; c) responsibility for the politics

and actions of business and respect for the dignity and interests of its stakeholders are

fundamental, and d) shared values, including a commitment to shared prosperity are as

important for a global community as for communities of smaller scale. All four points need

concrete global marketing micro ethical imperatives that we have suggested to make them

realistic and motivating. Global distributive justice in marketing calls for global cooperation,

trusting inter-country and inter-firm trade relationships (Corsten and Kumar 2005;

Narayandas and Rangan 2004), and global environmental and developmental responsibilities

of corporate global citizenship (Logsdon and Wood 2005). The U. S. Government can offer

leadership in this regard (see Aaronson 2005; Mascarenhas, Kesavan and Bernachi 2005a)

and so can the U. S. Global corporations (e.g., Levi & Strauss, and Nike). Even the poor of

the third world countries can be profitable (Prahalad 2004).

171

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179

THE PROFITABILITY OF CARRY TRADE:

EVIDENCE FOR FIVE CIS COUNTRIES

Razzaque H Bhatti

Bang College of Business, KIMEP University

Almaty 050010, Kazakhstan

[email protected]

ABSTRACT

This paper explores whether carry trade operations in the five CIS currencies – Armenian

drams, Azerbaijani manat, Kazak tenge, Kyrgyz soms and Moldovan lei – were profitable

over the period 1996:01-2010:02. The results show that carry trades in the five CIS

currencies funded by short positions in the Japanese yen and Swiss franc outperform the two

major stock markets–the Japanese Nikkei 225 and Swiss market indices. The annualized

quarterly returns in carry trades range between 1.5% and 14.01%, whereas those on the

Swiss market and Japanese Nikkei 225 market indices are 5.79% and -3.4%. The results show

that the average annualized interest differential are the highest for the Kyrgyz soms and

Armenian drams and the lowest for the Kazakh tenge and Azerbaijani manat when carry

trades in these currencies are funded with short positions in both the Japanese yen and Swiss

franc. However, the quarterly annualized mean return in carry trades is the highest in the

case of Armenian drams and the lowest in the case of the Kazakh tenge. These findings are

also strongly supported by the Sharpe ratios, which are 0.44 and 0.48 for the former currency

pairs and only 0.04 and 0.05 for the latter pairs, implying that the risk-adjusted return in

carry trade is the highest for the Armenian drams.

Key words: Uncovered interest parity, exchange rate and open economy

JEL Classification: F30, F31, F41.


180

INTRODUCTION

This paper explores the profitability of carry trade in five CIS countries–Armenia, Azerbaijan,

Kazakhstan, Kyrgyzstan and Moldova. Carry trade is described as a highly speculative

investment strategy whereby a currency manager borrows funds in a currency yielding low

interest rates (funding currency) to finance investment in a currency yielding high interest

rates (target currencies) in order to capitalize on the interest differential and possibly on the

expected movement in the exchange rate of the target against the funding currency. The carry

trade operation remains profitable as long as the gain from the interest rate differential is not

overwhelmed by short-to-medium term movements in exchange rates (Galati et al, 2007).

While one can be certain about the interest differential, he is not what the exchange rate will

be of the target against the funding currency at the time the loan will be repaid in the funding

currency. The movement in the exchange rates between the time the funds are borrowed and

paid back in low-interest currencies can add to the gains emanating from the interest

differentials, result in a smaller gain, or give rise to even a huge loss1. This implies that the

return in carry trades depends not only on the interest differential between funding and target

currencies but also on the expected rate of change of the exchange rate of the latter against the

former currencies. The carry trade operation becomes highly profitable as long as the high-

interest currencies appreciate against the low-interest currencies. On the contrary,

depreciation of the high-interest currencies may wipe out much of the gains from the interest

differential, and can even put a carry trader out of business if the depreciation of the high-

interest currencies is much higher than the interest differential2. Consequently, the carry trade

operation may entail a high degree of risk if the target currencies depreciate possibly by more

than the interest differentials over the holding period.

Carry trades have important implications for the exchange rates of funding against target

currencies as well as for monetary policies pursued in countries with low- and high-interest

currencies. Galati et al (2007) argue that carry trades typically tend to have asymmetric

impact on exchange rates. In general, the build-up of these positions is viewed to result in a

persistent strengthening of target currencies and weakening of funding currencies3. La Marca

(2007) holds the same view by arguing that the relative funds involved in carry trade activities

may trigger a cumulative effect on exchange rates, inducing an appreciation of target

currencies and a depreciation of funding currencies. According to him, Japanese-yen- and

Swiss franc-funded carry trade operations appear to have been responsible for a persistent

trend to towards appreciation of high-yielding currencies, such as the Australian dollar, New

Zealand dollar, Brazilian real, Turkish lira, South African rand, Korean won and the

currencies of some transition economies such as Hungry, Romania, Bulgaria and the Baltic

states. Funding currencies, such as the Japanese yen and Swiss franc, have demonstrated an

opposite trend. It is also argued that national monetary policies in these countries have

become increasingly affected by the pressures on exchange rates and inflows of short term

capital. The fear of a sudden stop of inflows of short term capital, currency depreciation and a

consequent inflationary pressure may induce central banks in these countries to maintain high

interest differentials and accommodate the increasing appetite of carry traders.

181

This paper aims to explore the profitability of the Japanese yen and Swiss franc–funded carry

trades in five currencies of the countries of independent states (CIS) – Armenia, Azerbaijan,

Kazakhstan, Kyrgyzstan and Moldova – using historical quarterly data on three-month

Treasury bills interest and spot exchange rates over the period 1996:01-2010:02. Since the

independence of these countries from the Soviet Union and their transition to a market

economic system, nominal interest rates in these CIS countries have been, and are still

consistently much higher than those of the two major currencies. Over the period under

consideration, the annualized average quarterly interest rates on T-bills in Japan and

Switzerland are in the range of 0.21% and 1.26% respectively, whereas the average

annualized quarterly interest rates are in the range of 19.31% (Kyrgyzstan) and 10.31%

(Kazakhstan) in the five CIS countries. This provides incentive to currency managers around

the world to borrow funds in the Japanese yen and Swiss franc4 and invest the funds borrowed

in each of the five currencies of the CIS countries to capitalize on differences in interest rates

and possibly on exchange rate movements. The objective of the paper is to explore whether

such carry trade opportunities in 10 currency pairs of the CIS countries with the Japanese yen

and Swiss franc have been profitable over the period under consideration. Besides, the paper

aims to assess whether there is any degree of risk involved in carry trades in the five CIS

currencies funded by the two major currencies. Several measures of return and risk are

employed in this study5. The measures of return used in this paper include mean annualized

and cumulative returns, whereas those of risk include standard deviation, downside semi-

standard deviation and value at risk. The Sharpe ratio is also used which measures a risk-

adjusted return on carry trades.

CARRY TRADE THEORY

Carry trade strategies are closely linked to the uncovered interest parity (UIP) hypothesis

postulating that high-interest currencies should depreciate whereas low-interest currencies

should appreciate by exactly the extent of the interest differential. Let F

ti and T

ti be the

interest rates on the funding and target currencies respectively set at time t, where T

t

F

t ii .

Also let tS and 1tS be the current and future spot exchange rates between the funding and

target currencies (defined as the target currency price of a unit of the funding currency,

implying that if the exchange rate increases, then the target currency will depreciate whereas

the funding currency will appreciate) prevailing at time t and t+1 respectively. The UIP

conditions is given by

T

F

t

t

i

i

S

S

1

11 (1)

Equation (1) can be approximated by

F

t

T

tt iiS 1 (2)

182

If equation (2) does not hold, then profit can be made by engaging in carry trades by taking a

short position in low interest currencies and a long position in high interest currencies, and as

such the return made on carry trade is given by

1)( t

FT Sii (3)

Equation (3) implies that the carry trade operation will not be profitable at all unless the UIP

condition (as represented by equation (1) or (2)) is violated consistently over time, implying

that the target currency depreciates against the funding currency by exactly the extent of the

interest differential and that the interest differential is eventually completely wiped out

forcing in equation (3) to be equal to zero over time6. This also implies that carry trade

will be highly profitable if the target currency appreciates at the time when the loan will be

paid back in the funding currency, that is 01 tS in equation (3) and as such in this case

return on carry trade comes not only from the interest differential but also from the gain on

currency holding. Thus carry trade can still be profitable as long as the target currency does

not depreciate by more than the interest differential as indicated by equation (3); however, if

the target currency depreciates by more than the interest differential then carry trade may

result in huge losses.

It must, however, be noted that the failure of UIP is not the only cause for carry trade. The

other cause for carry trade is the failure of CIP, resulting in opportunities for profit that can be

made by financing long positions in the currencies selling at a discount via short positions in

the ones selling at a premium. Because covered interest parity must hold as an arbitrage or a

hedging condition, the two forms of carry trades are equivalent (Moosa, 2010; p.362).

EXISTING EVIDENCE ON CARRY TRADE

A number of studies have been conducted exploring the return and risk characteristics of

carry trades in the currencies yielding higher interest rates funded by short positions in the

currencies yielding lower interest rates and produced results showing that carry trades yield

profits if maintained over long periods. Testing carry trade strategies for 10 currency pairs –

involving the Japanese yen and Swiss franc as two funding currencies and the Australian

dollar, Indian rupee, Indonesian rupiah, New Zealand dollar and Philippine peso as target

currencies – Gyntelberg and Remolona (2007) produced evidence showing that carry trades

outperformed the major stock markets over the period December 2000-September 2007. The

results they obtained show that the annualized average daily returns on these currency pairs

were in the range of 12.9 to 2.40% compared to 2.18 to 5.47% on stock market indices

including the S&P 500, Nikkei 225 and FTSE 100. The annualized daily returns on carry

trades were much higher when the Japanese yen was used as the funding currency than when

the Swiss franc was used. For example, the returns on the New Zealand dollar, Australian

dollar, and Indonesian rupiah were 14.94%, 12.50% and 10.40% respectively when the

183

Japanese yen was used as the funding currency, whereas of those involving the Swiss franc

were 8.38%, 6.08% and 4.13% respectively. They also found evidence strengthening the

results of earlier studies conducted by Galati et al (2007) and Hattori and Shin (2007)

showing that volumes of carry trade involving the yen are high when interest differential

against the yen are high. Based on the carry-to-risk ratio (the interest differential adjusted by

the risk of future exchange rate movements), Galati et al (2007) found that carry trade

positions that were short the Japanese yen, Swiss franc and US dollar and long the Australian

dollar, New Zealand dollar and British pound were increasingly promising between the period

2002-2005. Results obtained by studies conducted, inter alia, by Burnside et al (2007), Dunis

and Miao (2007), Jurek (2008), Moosa (2008), Dravas (2009) and Fong (2010) were also

supportive of the profitability of carry trade over long periods.

Burnside et al (2007) find that carry trades applied to two different portfolios – one consisting

of the currencies of developed countries and the other currencies of both developed and

emerging markets7 – yield high average payoffs as well as Sharpe ratios that are substantially

higher than those associated with the US stock market. They attribute the high Sharpe ratio

associated with the carry trade strategy to the diversification effect that results from

combining individual currencies into portfolios. Examining yen-based carry trade over the

period 2001-2009, Fong (2010) produced results generating high mean returns and Sharpe

ratios prior to the global financial crisis. Moosa (2008) argue that although carry trades could

be profitable over a long period of time, significant losses could arise on a single occasion

that may put a carry trader out of business. He used different measures to examine the risk

and return profile of six currency combinations involving two funding currencies (the

Japanese yen and Swiss franc) and three target currencies (the US dollar, UK pound and

Canadian dollar) and quarterly historical data covering the period 1995:4-2006:4. Results

show that the yen carry trade with the British pound as a target currency, yielding the highest

interest differential, is the most profitable. This combination produces an average annualized

return of 9.04% and an average annual compound return of 8.87%. The combination that

produces the lowest return is the US dollar with the Swiss franc as the funding currency.

Moosa (2008) also uses the performance of the Monte Carlo simulations on the rate of return

on carry trade in order to determine whether or not the results obtained are just due to a

chance resulting from small sample bias. Based on the fitted distributions of Kolmogorov

Smirnov test to pick the most appropriate distribution out of a list of 15 possible continuous

contributions, it was found that in no case is the return normally distributed, and in most cases

the rate of return follows a distribution that is similar to the distributions followed by the

percentage change in the exchange rate, which is the source of risk in carry trade. The

probability or the certainty level that a positive return will be produced by any single carry

trade operation for the underlying currency pair was shown to be too low for comfort. All

measures of distribution (downside risk, value at a risk and Sharpe ratio) used in the study

showed that significant risk was associated with carry trade.

Moosa (2008) demonstrates that carry trade can be profitable if conducted over a long period

of time, but the risk involved can be high. Assessing the profitability of carry trade for six

184

currency combination – CAD/USD, JPY/USD, GPB/USD, JPY/CAD, JPY/GBP and

CAD/GBP – using monthly data on over the period December 1999-June 2006, Moosa (2010)

produced results which cast doubt on the profitability of carry trade. These results were

interpreted as indicating that there is mostly a fifty-fifty chance that profit can be made from a

single carry trade operation. Baillie et al (2011) also demonstrate that carry trade involves

significant foreign exchange risk to the extent that it may not be worthwhile in terms of risk

and return. They warn that carry trade may involve excessive risk over a long period of time

if the fundamental of a currency is ignored, and as such they may be also vulnerable to any

sudden unanticipated changes in exchange rates. Testing carry trade strategies for the Pak

rupee using the Japanese yen, Swiss franc and US dollar as funding currencies over the period

1995:01-2010:06, Bhatti (2012) also found results indicating that carry trade operation which

appears to be highly profitable because of significant interest differential on Pak rupee

eventually turns out to be highly unprofitable and risky at the end of day because of enormous

depreciation of the Pak rupee over the sample period. Results based on all the measures of

return and risk employed in this study show that major equity markets, except for Nikkei 225,

outperform carry trades in the Pak rupee funded in three major currencies. The results

produce relatively higher average annualized returns and lower standard deviations for S&P

500 and Swiss equity markets rather than for carry trades, giving rise to higher Sharp ratios

for the former than for the latter. This implies that risk-adjusted returns of equity markets are

much higher than those of carry trades. The results also show that the mean of the interest

differential is the highest when the Pak rupee is paired with the Japanese yen (PKR/JPY) than

when it is paired with the Swiss franc and US dollar (PKR/CHF and PKR/USD). Although

high interest differentials apparently make carry trades appear very profitable, enormous

depreciation of the Pak rupee over the sample period has resulted in huge losses in carry

trades. An important conclusion that emerges from these results is that carry trade operations

may become highly unprofitable and risky if a target currency depreciates by more than the

interest differential.

EMPIRICAL RESULTS

The results of the annualized quarterly returns in carry trades, as presented in Table 1, show

that the Japanese-yen and Swiss-franc-funded carry trades in the five CIS currencies were

highly profitable over the last 15 years and six month. As evident from Table 1, carry trades

in all the CIS-currency pairs with the Japanese yen and Swiss franc outperform the two major

stock markets–the Japanese Nikkei 225 and Swiss market indices. The annualized quarterly

returns in carry trades range between 1.50% (in the case of the KZT/CHF pair) and 14.01%

(in the case of the ARD/JPY pair), whereas the Swiss market index produces an annualized

quarterly return of 5.79% and Nikkei 225 market index produces a negative return of 3.4%.

Moreover, the risk in carry trades (as measured by standard deviation) in eight currency pairs

is lower than that of the stock markets, whereas the downside risk (measured by VaR) of

carry trades in all cases is the lowest. It must also be noted that carry trades in all cases

produces Sharpe ratios which are higher than those of the stock markets, implying that risk-

adjusted returns on carry trades are higher than those of the stock markets.

185

TABLE 1: RETURN AND RISK ON CARRY TRADES

Currency

Pairs

Mean

Interest

Differential

Positive

change

in

exchange

rate (%)

Positive

return

(%)

Mean

annualized

return

Cumulative

return

Standard

deviation

Downside

semi

standard

deviation

99%

value

at risk

Sharpe

ratio

ARD/JPY 15.47 50.88 73.68 14.01 530.62 31.22 27.99 58.72 0.44

AZM/JPY 10.66 48.07 69.23 8.06 153.07 26.08 20.53 64.06 0.31

KRS/JPY 19.09 52.63 72.93 6.16 77.31 38.58 24.31 118.61 0.16

KZT/JPY 10.1 49.12 70.18 1.61 -3.92 35.88 17.58 113.89 0.04

MDL/JPY 16.88 49.12 61.4 5.61 -43.1 54.96 24.59 10.2 0.1

ARD/CHF 14.43 42.11 70.18 13.78 501.85 28.43 27.19 47.38 0.48

AZD/CHF 9.64 44.23 69.23 6.9 64.48 22.22 18.97 41.86 0.31

KRS/CHF 18.05 57.89 66.67 6.41 78.17 31.56 24.5 81.98 0.2

KZT/CHF 9.04 49.12 63.16 1.5 17.67 32.38 18.67 100.92 0.05

MDL/CHF 15.83 51.88 66.67 6.08 23.31 43.32 24.62 143.32 0.14

Swiss

Market

Index 5.79 41.30 30.78 92.20 0.14

Nikkei

225 -3.40 43.18 28.20 91.10 -0.08

The results also show that annualized averages of the interest differential and carry trade

returns are the highest for the Kyrgyz soms when it is paired with both the Japanese yen and

Swiss franc and the lowest for the Azerbaijani manta and Kazakh tenge when they are paired

with both the Japanese yen and Swiss franc. These findings are strongly supported by the

Sharpe ratios, which are 0.62 and 0.72 for the former currency pairs and only in the range

between 0.45 and 0.50 for the latter pairs. This implies that the risk-adjusted return in carry

trade is the highest for the former than the latter. However, the frequency of positive return

for the KRS/CHF pair is much higher than the positive changes in the underlying exchange

rate when compared with that of the KRS pair with Japanese yen. Similarly, the frequency of

positive return for the MDL/JPY, ARD/CHF, AZD/CHF and MDL/CHF currency pairs is

also much higher than the positive changes in the underlying exchange rates. This leaves the

biggest percentage of negative rates of return for the ARD, AZM, and KRS when they are

paired with the Japanese yen and the KZT when it is paired with both the Japanese yen and

Swiss franc, implying that the highest risk is involved in these currency pairs. These results

are supported by the findings based on the Sharpe ratio, showing that the risk-adjusted return

in carry trade is the highest for the Kyrgyz soms and lowest for Kazak tenge. These results

clearly imply that carry trades in the Kyrgyz soms initiated by short positions in both the

major currencies are relatively more profitable than those of other currency pairs. This finding

186

becomes more pronounced in Figure 1, showing that the annualized quarterly returns in the

Kyrgyz soms tend to have been positive and have often been quite high on more occasions

and that only on a smaller number of occasions have returns in carry trades been negative.

This also implies that the probability of huge occasional losses is much smaller in the Kyrgyz

soms than in other currency pairs.

FIGURE 1: CARRY TRADE RETURN

ARD/JPY

-80

-60

-40

-20

0

20

40

60

80

AZM/JPY

-80

-60

-40

-20

0

20

40

60

KRS/JPY

-200

-150

-100

-50

0

50

100

KZT/ J P Y

-200

-150

-100

-50

0

50

100

187

FIGURE 1: CONT.

Figure 2 depicts returns on carry trades and two market indices, as measured by annualized

quarterly returns and Sharpe ratio, as well as risk on carry trades and two market indices, as

measured by standard deviation and value at risk. Clearly, annualized quarterly as measured

by mean returns and risk-adjusted returns as measured by Sharpe ratio on carry trade are

highest on Armenian drams when it is paired with both the Japanese yen and Swiss franc.

Likewise, the risk on carry trade as measured by standard deviation and value at risk is the

lowest in the case of Armenian drams when compared with all currency pairs except

Azerbaijani manta and Moldovan lei respectively.

MDL/JPY

-400

-300

-200

-100

0

100

ARD/CHF

-80

-60

-40

-20

0

20

40

60

80

AZM/CHF

-50 -40 -30 -20 -10

0 10 20 30 40 50

KRS/CHF

-100

-80

-60

-40

-20

0

20

40

60

80

KZT/CHF

-200

-150

-100

-50

0

50

100

MDL/CHF

-300

-250

-200

-150

-100

-50

0

50

100

188

FIGURE 2: RETURN AND RISK

CONCLUSIONS AND IMPLICATIONS

In this paper the profitability is explored in carry trade operations in the five CIS currencies –

Armenian drams (ARD), Azerbaijani manat (ABM), Kazakhstan tenge (KZT), Kyrgyz soms

(KRS) and Moldovan lei (MDL) – funded by short positions in the Japanese yen and Swiss

franc using quarterly data on spot exchange rates and interest rates in Treasury bill markets

over the period 1996:01-2010:02. Two important conclusions emerge from these results.

First, results based on several measures of return and risk show that carry trades in five CIS

currencies outperform the two major stock markets–the Swiss market index and Nikkei 225

market index. The annualized quarterly returns realized in carry trade operations in the five

CIS currencies funded by short positions in the Japanese yen and Swiss franc are highly

profitable in all cases over the last 15 years and six month. The annualized quarterly return in

Mean Return

-6

-4

-2

0

2

4

6

8

10

12

14

16

ARD/JPY

AZM

/JPY

KRS/

JPY

KZT/

JPY

MDL/

JPY

ARD/C

HF

AZM

/CHF

KRS/

CHF

KZT/

CHF

MDL/

CHF

Swiss In

dex

Nik

kei 2

25

Standard Deviation

0

10

20

30

40

50

60

ARD/JPY

AZM

/JPY

KRS/

JPY

KZT/

JPY

MDL/

JPY

ARD/C

HF

AZM

/CHF

KRS/

CHF

KZT/

CHF

MDL/

CHF

Swiss In

dex

Nik

kei 2

25

Sharpe Ratio

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

ARD/JPY

AZM

/JPY

KRS/

JPY

KZT/

JPY

MDL/

JPY

ARD/C

HF

AZM

/CHF

KRS/

CHF

KZT/

CHF

MDL/

CHF

Swiss In

dex

Nik

kei 2

25

Value at Risk

0

20

40

60

80

100

120

140

160

ARD/JPY

AZM

/JPY

KRS/

JPY

KZT/

JPY

MDL/

JPY

ARD/C

HF

AZM

/CHF

KRS/

CHF

KZT/

CHF

MDL/

CHF

Swiss In

dex

Nik

kei 2

25

189

carry trades ranges between 12.7% and 32.5%, whereas the Swiss market index produces an

annualized quarterly return of 5.79% and Nikkei 225 market index produces a negative return

of 3.4%. Moreover, carry trades in all cases produces Sharpe ratios which are higher than

those of the stock markets, implying that risk-adjusted returns on carry trades are higher than

those of the stock markets.

Second, results also show carry trades in the Kyrgyz soms outperform those of other CIS

currencies when paired with both the Japanese yen and Swiss franc. The annualized averages

of the interest differential and carry trade returns are the highest for the Kyrgyz soms and the

lowest for the Azerbaijani manta and Kazakh tenge when these currencies are paired with

both the Japanese yen and Swiss franc. These findings are strongly supported by the Sharpe

ratios, which are 0.62 and 0.72 for the former currency pairs and only in the range between

0.45 and 0.50 for the latter pairs. This implies that the risk-adjusted return in carry trade is the

highest for the former than the latter. However, the frequency of positive return for the

KRS/CHF pair is much higher than the positive changes in the underlying exchange rate

when compared with that of the KRS pair with Japanese yen. Similarly, the frequency of

positive return for the MDL/JPY, ARD/CHF, AZD/CHF and MDL/CHF currency pairs is

also much higher than the positive changes in the underlying exchange rates. This leaves the

biggest percentage of negative rates of return for the ARD, AZM, and KRS when they are

paired with the Japanese yen and the KZT when it is paired with both the Japanese yen and

Swiss franc, implying that the highest risk is involved in these currency pairs.

END NOTES

1. In fact, while the interest differential is a necessary condition for the profitability in

carry trades, it is not a sufficient condition. The sufficient for the profitability in carry

trades is the expected change in the exchange rate of the funding currency against the

target currency. If the funding currency depreciates by more than the interest

differential, then the carry trade operation may be completely wiped out.

2. Zukerman and Pacelle (1999) argue that “much of the time this “yen carry activity” is

quite successful, although it can backfire if the yen appreciates sharply as it did in 1998

and 1999.

3. However, a sudden unwinding of these positions may give rise to a tendency for target

currencies to depreciate and funding currencies to appreciate sharply (see, for example,

Beranger et al, 1999; and Cairns et al, 2007).

4. As McCauley and McGuire (2009,p86-87) argue, both the Japanese yen and Swiss

franc are “safe haven” currencies (that is, currencies with low risk and high liquidity)

and are considered to be the funding currencies in carry trades. They hold the view that

such structural features of Switzerland as political stability, low inflation, confidence in

the central bank, comfortable official foreign reserves, high savings and net foreign

asset position, as pointed out by Jordan (2009) to explain as to why the Swiss franc

serves as safe heaven, matter less than low yields. According to them, “Japan and

190

Switzerland may have much in common, but it is primarily low yields that have

recommended the yen and franc as funding currencies”.

5. For a detailed discussion in these measures of return and risk on carry trades, see

Moosa (2008p.10-11)

6. This is why Gyntelberg and Remolona (2007) describe carry as “essentially a bet

against UIP”.

7. Using data used data on spot and forward rates against the US dollar for 63 currencies,

Burnside et al (2007) found that the inclusion of emerging market currencies in the

portfolio substantially increases the Sharpe ration. Some of the emerging market

currencies in the portfolio include the currencies of India, Kazakhstan, Pakistan,

Philippines, Qatar, Saudi Arabia, Singapore Turkey and Ukraine etc.

REFERENCES

Baillie, R.T. and Chang, S.S. (2011), “Carry Trades, Momentum Trading and the Forward

Premium Anomaly”, Journal of Financial Markets, 14, 441-464.

Beranger, F., Galati, G., Tsatsaronis, K. and von Kleist, K. (1999), “The Yen Carry Trade and

Recent Foreign Exchange Market Volatility”, BIS Quarterly Review, March, 33-37.

Bhatti, R. H. (2012), “On Return and Risk in Carry Trades: A Case of the Pak Rupee”,

International Journal of Economics and Finance Studies, forthcoming.

Burnside, C., Eichenbaum, M. and Rebelo, S. (2007), “The Returns to the Currency

Speculation in Emerging Markets”, American Economic Review, 97, 333-338.

Cairns, John, Ho, Corrinne and McCauley, Robert (2007), “Exchange Rates and Global

Volatility: Implications for Asia-Pacific Currencies”, BIS Quarterly Review, March, 41-52.

Dravas, Z. (2009), “Leveraged Carry Trade Portfolios”, Journal of Banking and Finance, 33,

944-957.

Dunis, C.L. and Miao J. (2007), “Trading Foreign Exchange Portfolios with Volatility Filters:

the Carry Rrade Model Revisited”, Applied Financial Economics, 17, 249-255.

Fong, W.M. (2010), “A Stochastic Dominance Analysis of Yen Carry Trades”, Journal of

Banking and Finance, Vol. 34, pp. 1237-1246.

Galati, G., Heath, A. and McGuire, P. (2007), “Evidence of Carry Trade Activity”, BIS

Quarterly Review, September, 27-41.

Gynelberg, J. and Remolona, E. (2007), “Risk in Carry Trades: A Look at Target Currencies

in Asia and the Pacific”, BIS Quarterly Review, December, 73-82.

Hottori, M. and Shin, H. S. (2007), “The Broad Yen Carry Trade,” Bank of Japan, Institute

for Monetary and Economic Studies, Discussion Paper No 2007-E-19.

Jorda, O. and Taylor, A. (2009), “The Carry Trade and Fundamentals: Nothing to Fear but

FEER itself”, NBER Working Papers, No 15518.

191

Jurek, J.W. (2008), “Crash-Neutral Currency Carry Trades”, Working Paper, Princeton

University.

La Marca, M. (2007), “The Carry Trade and Financial Fragility”, in Coping with Globalized

Finance: Recent Challenges and Long-term Perspectives, Proceedings of United Nations

Conference on Trade and Development, 3-21.

McCauley, R. N. and McGuire, P. (2009), “Dollar Appreciation in 2008: Safe Heaven, Carry

Trades, Dollar Shortage and Overhedging”, BIS Quarterly Review, December, 85-93.

McGuire, P. and Upper, C. (2007)”, Detecting FX Carry Trades”, BIS Quarterly Review,

March, 8-9.

Moosa, I. A. (2008), “Risk and Return in Carry Trade”, Journal of Financial

Transformation”, 22, 10-15.

Moosa, I.A. (2010), “The Profitability of Carry Trade”, Economia Internazionale, 63, 261-

380.

Zukerman, G. and Pacelle, M. (1999), “Treasury Prices Fall as Hedge Funds Seek to Unwind

Yen Carry Trades”, Wall Street Journal, June 14, 1.

192

DOES ADDING INTERMEDIATE ALGEBRA AS A PREREQUISITE FOR

ECONOMICS PRINCIPLES COURSES IMPROVE STUDENT SUCCESS?

Steven J. Balassi, Richard H. Courtney, and William Lee

Saint Mary‟s College of California, Moraga, U.S.A.

[email protected]

INTRODUCTION

Teachers and researchers of economics have expressed considerable interest in the

relationship between students‟ mathematical ability and their success in economics.

Interest in this relationship has heightened recently as a result of actions by

accrediting agencies requiring colleges to more objectively assess student learning as

part of a cycle of continuing educational improvement.

In a possible response to this, the State of California has developed and currently uses

a measure of student learning called the “Success Rate” (SR) which is the percentage

of students who receive a C or better in a course. The State calculates this SR for all

courses taught in the California Community College System.

In the 2009 fall semester, the faculty at Napa Valley College (NVC) implemented a

requirement that students enrolling in principles of economics courses must have

previously successfully completed a course in intermediate algebra. Another nearby

college, Solano Community College (SCC), had not, as of spring 2011, implemented

this requirement.

The purpose of this study is to analyze the SR of students in introductory economics

courses at these two institutions and determine whether or not the imposition of an

intermediate algebra requirement in fact improves student learning in principles of

economics courses.

LITERATURE REVIEW

Numerous studies have attempted to ascertain factors influencing student learning and

performance in principles of economics courses. Typically, educational production

functions are employed in which output, measured in terms of economic knowledge,

is expressed as a function of productivity inputs. Variables used as productivity

inputs include measures of student ability, such as high school GPA and SAT scores;


193

student characteristics, such as gender and ethnicity; as well as instructional

techniques employed.

Mathematical ability is frequently hypothesized to be one of the most important

determinants of student success in principles of economics courses. Many of the

studies examining the determinants of student success have attempted to control for

students‟ mathematical ability by utilizing a dummy variable to indicate whether or

not students had taken a calculus course prior to taking introductory economics or by

incorporating a measure of mathematical aptitude, such as students‟ scores on the

mathematics portion of the SAT. Anderson, Benjamin, and Fuss (1994) found that

background knowledge of calculus had a significant positive effect on student

performance in introductory economics courses. Durden and Ellis (1995) also found

that SAT scores in mathematics had a significant positive effect and the same result

was found for students‟ experience with calculus. Previously, Williams, Waldauer,

and Duggall (1992) found that mathematics SAT scores were a major determinant of

student success in introductory economics for all types of exams, excluding essay

exams. Brassfield, Harrison, and McCoy (1993) reported that having completed a

sequence of courses in business math had a significant positive impact on students‟

grades.

While the previous studies all found math skills to be important as a determinant of

success in introductory economics courses, the precise skills contributing to students‟

success have not been well identified. Ballard and Johnson (2004) used a broader

array of explanatory variables to identify which math skills are important for success

in introductory microeconomics courses. They examined students‟ scores on the math

portion of the ACT Assessment Test, whether student had taken a calculus course,

whether students had been required to take remedial math, and students‟ scores on a

test of basic mathematical concepts. They found that “all four measures used have

significant effects in explaining performance in an introductory microeconomics

course”. However, they also concluded that “quantitative skills are sufficiently

multidimensional that no single variable is likely to represent them adequately. The

multiple measures of math achievement are relatively independent and are all

statistically significant”. In addition, they concluded that “mastery of extremely basic

quantitative skills is among the most important factors for success in introductory

microeconomics” and that “improvements in student performance may depend on

improved mastery of basic algebra”. This study extends the existing literature by

addressing the effect of introducing a prerequisite of intermediate algebra on student

success in introductory economics courses

194

BACKGROUND

Napa Valley College (NVC) is located in Napa, California. It is a member of the

California Community College (CCC) system and has about 4,500 full-time

equivalent students. Many of NVC‟s students take courses that will enable them to

transfer to four-year institutions to complete their Bachelor‟s degree. Not all courses

are transferable from a CCC to a four-year institution. The process of having a course

transferable from a CCC to a four-year institution is known as articulation.

Articulation agreements are contracts between the CCC‟s and four-year institutions.

These agreements are in place so students know whether or not the courses they are

taking will count when they move from the CCC to a four-year institution. The

essence of these agreements is to help students plan and not take unnecessary courses.

NVC offers two economics courses which are transferable to almost all four-year

institutions. Both principles of macroeconomics and principles of microeconomics

may be taken at NVC and accepted for credit by four-year institutions. Before the

2009 fall semester started, NVC was informed that certain four-year institutions

would not allow these two courses to count at their institutions unless NVC added a

prerequisite of intermediate algebra. After some discussion and debate, the NVC

faculty decided it was in the best interest of their students to add the intermediate

algebra prerequisite. Fall 2009 was the first semester students had to have passed an

intermediate algebra course before being allowed to enroll in either principles of

macroeconomics or principles of microeconomics.

Also included in the study is Solano Community College (SCC), a similar-sized

institution located in a county adjacent to NVC that serves an overlapping

demographic population. While SCC also offers principles of economics courses, its

faculty had not, as of spring 2011, implemented an intermediate algebra requirement

as a prerequisite for these courses. This pilot study compares the SR in all economics

principles courses taught at both of these colleges each semester from fall 2004

through spring 2011. The goal of the study is to ascertain whether SRs in the

principles courses at NVC were affected by implementation of an intermediate

algebra prerequisite. Data concerning enrollments and number of students receiving a

grade of C or higher in economics principles courses at NVC and SCC were provided

by the California Community College System.

RESULTS AND ANALYSIS

195

Table 1 shows the SRs in the introductory economics courses for NVC and SCC for

the period fall 2004 through spring 2011. The SRs for the two colleges appear to be

very similar until fall 2009, the semester when the NVC faculty implemented the

intermediate algebra prerequisite. At this time, the SR at NVC increased dramatically

while it remained relatively constant at SCC, where no prerequisite requirement was

implemented. Table 1 also shows the weighted average of the SR at each college

before and after implementation of the prerequisite at NVC in fall 2009. The weighted

average SR at NVC improved from 56.6 percent for the period prior to imposition of

the prerequisite to 74.6 percent for the period following imposition of the prerequisite.

For SCC, the weighted average fell from 54.3 percent prior to fall 2009 to 50.5

percent in the period beginning with fall 2009. Results are shown graphically in

Figure 1.

NVC‟s weighted average SR following implementation of the prerequisite

requirement is statistically higher than prior to implementation of the prerequisite

requirement at the 99 percent confidence level while there is no significant difference

in the weighted average SR at SCC between the two periods. Moreover, a

comparison of means test of the weighted average SR of NVC and SCC during the

pre-fall 2009 period showed no statistically significant difference. Using the same test

to compare the weighted averages between the two colleges for the period following

implementation of the prerequisite shows a statistically significant difference at the 95

percent level of confidence (74.6% for NVC to 50.5% for SCC).

Table 2 shows SRs for both male and female students during the period fall 2004

through spring 2011. Both prior to, and following, implementation of the

intermediate algebra requirement in fall 2009, there was no statistically significant

difference in the SR for males and females. In addition, the improvement in the SR

for males following implementation of the algebra requirement was statistically

significant at the 95 percent level of confidence while the improvement for females

was significant at the 99 percent confidence level.

CONCLUSIONS, IMPLICATIONS, AND LIMITATIONS

Lacking data for other variables that may have affected the results obtained, this pilot

study suggests that imposition of an intermediate algebra requirement at NVC did in

fact, improve student learning, as measured by the SR in principles of economics

courses. However, because of data limitations, the results obtained are subject to

further analysis. First, it would be desirable to incorporate additional demographic

information about students into the analysis. Changes in demographic characteristics

196

of students taking the economics principles courses prior to and following

implementation of the intermediate algebra prerequisite at NVC might account for at

least a portion of the improvement in SR observed. While it is possible that some of

the improvement in the SR observed at NVC following implementation of the

intermediate algebra requirement might be attributed to a significant change in student

characteristics, the authors are not aware of any substantial change in student

characteristics during that period. Still, incorporating student demographic

information would be a refinement that could further support the conclusion that

requiring successful completion of an intermediate algebra requirement course leads

to increased student success in economics principles courses. Further, inclusion of

student demographic information could shed light on whether specific student groups

were affected differently by the implementation of an intermediate algebra

requirement. However, existing data do indicate that results obtained for males and

females were not significantly different.

In addition, the SR (C or better) is not likely to be the most objective or reliable

measure of student learning. While some studies use course grades as a measure of

student learning (Ball, Eckel and Rojas, 2006) most other research has used

standardized test questions, often the Test of Understanding in College Economics

(e.g. Lee, Balassi, Courtney 2010) to more objectively measure student success.

It should also be noted that in the fall 2010 and spring 2011 semesters, the SR at NVC

exhibited a further increase from the levels achieved in fall 2009 and spring 2010.

There is not yet sufficient data to determine if these results are significantly different

from the SRs achieved in fall 2009 and spring 2010, or whether the higher SRs will

continue. One conjecture is that the improved results reflect some geographical

shifting of students between NVC and SRR with weaker students, who had not

completed an intermediate algebra course, choosing to attend SCC to complete their

economics principles courses, thereby “weeding out” these weaker students and

improving the SR at NVC. This process would occur over time, giving rise to the

delayed increase in SR at NVC. Such a shift could also have contributed to the

decline in the SR at SCC in fall 2010 and spring 2011, even though such declines

were not found to be statistically significant.

Finally, prior to the 2009 fall semester, it is likely that some students who enrolled in

principles of economics courses at NVC had successfully completed an intermediate

algebra course and results for these students are reflected in the SRs calculated for

NVC prior to implementation of the algebra requirement. While it seems likely that

not all students who completed economics principles courses at NVC prior to the fall

2009 semester had successfully completed intermediate algebra as a prerequisite,

197

because this is not known with certainty, it is not possible to attribute the statistically

significant improvement in SR at NVC solely to implementation of the algebra

requirement. Overall, however, based on results of this study, implementation of an

intermediate algebra prerequisite appears to have considerable merit both for students

and institutions in improving student performance in introductory economics courses.

TABLE 1- STUDENT SUCCESS RATES IN PRINCIPLES OF ECONOMICS

COURSES, NAPA VALLEY AND SOLANO COMMUNITY COLLEGES,

2004-2011

SR* Enrollment Succeeded SR* Enrollment Succeeded

Percentage # of Students # of Students Percentage # of Students # of Students

Fall 2004 57.7 194 112 57.9 425 246

Spring 2005 60.6 180 109 55.3 479 265

Fall 2005 59.5 185 110 48.9 523 256

Spring 2006 57.5 179 103 52.5 413 217

Fall 2006 59.0 188 111 53.7 462 248

Spring 2007 51.3 191 98 53.5 462 247

Fall 2007 54.8 177 97 53.0 447 237

Spring 2008 52.7 201 106 57.4 427 245

Fall 2008 55.7 185 103 59.7 417 249

Spring 2009 57.4 282 162 52.5 509 267

Fall 2009 68.9 183 126 53.1 439 233

Spring 2010 69.9 236 165 51.7 495 256

Fall 2010 81.8 143 117 48.6 451 219

Spring 2011 80.2 207 166 48.9 560 274

Total 2731 1685 6509 3459

Weighted Avg. F04-S09 56.6 54.3


Percentage Point Difference 18.0 -3.8

Solano Community CollegeNapa Valley College

Shaded rows represent semesters in which the intermediate algebra prerequite was

implemented at NVC.

*SR indicates a student received a grade of C or better.

FIGURE 1- STUDENT SUCCESS RATES IN PRINCIPLES OF ECONOMICS

COURSES, NAPA VALLEY AND SOLANO COMMUNITY COLLEGES,

2004-2011

198

TABLE 2- STUDENT SUCCESS RATES IN PRINCIPLES OF ECONOMICS

COURSES AT NAPA VALLEY COLLEGE, FEMALES VS. MALES, 2004-

2011

199

SR* Female Enrollment Female Succeeded SR* Male Enrollment Male Succeeded

Percentage # of Students # of Students Percentage # of Students # of Students

Fall 2004 58.0 88 51 57.5 106 61

Spring 2005 58.2 91 53 62.9 89 56

Fall 2005 64.6 82 53 55.3 94 52

Spring 2006 58.9 90 53 56.0 84 47

Fall 2006 64.4 73 47 55.7 115 64

Spring 2007 52.7 74 39 50.0 116 58

Fall 2007 62.0 79 49 49.5 97 48

Spring 2008 57.1 84 48 49.6 117 58

Fall 2008 53.0 83 44 59.0 100 59

Spring 2009 61.3 119 73 55.0 160 88

Fall 2009 80.5 77 62 76.2 84 64

Spring 2010 78.9 95 75 63.6 140 89

Fall 2010 88.1 59 52 77.4 84 65

Spring 2011 79.2 96 76 80.9 110 89

Total 1190 775 1496 898



Percentage Point Difference 22.7 19.5

Shaded rows represent semesters in which the intermediate algebra prerequite was

implemented at NVC.

*SR indicates a student received a grade of C or better.

200

REFERENCES

Anderson, G., Benjamin, D., and Fuss, M. “The Determinants of Success in

University Introductory Economics Courses”. The Journal of Economic Education.

1994.

Ball, S., Eckel, C., and Rojas, C. “Technology Improves Learning in Large Principles

of Economics Classes: Using Our WITS”. American Economic Review. 2006.

Ballard, C. and Johnson, M. “Basic Math Skills and Performance in an Introductory

Economics Class”. The Journal of Economic Education. 2004.

Brasfield, D., Harrison, D., and McCoy, J. “The Impact of High School Economics on

the College Principles of Economics Course”. Journal of Economic Education. 1993.

Durden, G. & Ellis, L. "The Effects of Attendance on Student Learning in Principles

of Economics". American Economic Review. 1995.

Lee W., Courtney R., and Balassi S. “Do Online Homework Tools Improve Student

Results in Principles of Microeconomics Courses?”. American Economic Review.

2010.

Williams, M., Waldauer, C., and Duggal, V. "Gender Differences in Economic

Knowledge: An Extension of the Analysis". Journal of Economic Education. 1992.

201

GOODNESS-OF-FIT TESTS FOR TWO-DIMENSIONAL CIRCULAR

NORMAL PROBABILITY DISTRIBUTION

Voinov Vassilly

KIMEP University, 2 Abai Av. Almaty 050010, Republic of Kazakhstan

Email: [email protected]

Pya Natalya



Makarov Rashid



Voinov Yevgeniy

Institute for Mathematics and Mathematical Modelling of the Ministry of Education

and Science of the Republic of Kazakhstan, 125 Pushkin St. Almaty 050010


ABSTRACT

Based on the idea of McCulloch (1985) we introduced new modified chi-squared

test,2

nS , for bivariate circular normality. We compare the power of 2

nS with that for

other modified chi-squared tests and with the well-known Anderson–Darling 2A ,

Cramer-von Mises 2W , and Mardia‟s (1970) tests. The results reveal two advantages

of 2

nS statistic over abovementioned tests: while possessing a comparable power, the

2

nS does not require simulation of critical values to define rejection region even for

small samples, and removes requirement for defining the optimal number of grouping

intervals.

202

INTRODUCTION

Multivariate normality is required for correct statistical inferences in very many cases.

It is well known that the joint normality does not follow from the normality of

marginal univariate distributions (see, e.g., Kotz et al. (2000)). The literature on tests

of fit for the multivariate normal family is not such an extensive as for the assessing

the univariate normality, but the last twenty years have seen an increased activity in

this regard. Mardia (1970), and Malkovich and Afifi (1973) derived several tests

based on a generalizations of the univariate skewness and kurtosis statistics. For

alternative generalizations see Balakrishnan et al. (2007), and Balakrishnan and

Scarpa (2012). For other pertinent work in this regard, see Shapiro and Wilk (1965),

Royston (1983), Srivastava and Hui (1987), Tserenbat (1990), Looney (1995), Henze

and Wagner (1997), Henze (2002), Doornik and Hansen (2008).

More elaborate lists of references can be obtained from the review articles of Henze

(2002) and Mecklin and Mundfrom (2004).

MODIFIED CHI-SQUARED TESTS

Moore and Stubblebine (1981) developed a test for multivariate normality as follows.

Let 1,..., nX X be independent identically distributed p-variate ( 2p ) normal random

vectors with the following joint probability density function

/2 1/2 11

| 2 | exp ,2

p Tf

x x x

where is a p -vector of means and is a non-singular p p matrix. Let a given

vector of unknown parameters be

1 11 12 22 1 2,..., , , , ,..., , ,..., ,..., ,T

p j j jj pp where the elements of the

matrix are arranged column-wise by taking the elements of the upper-triangular

sub matrix of . Given 0 10 ... Mc c c , the M random grouping cells can be

defined as (Moore and Stubblebine, 1981)

1

1ˆ in R : , ,

Tp

in n i iE c c i = 1,...,M

X X X S X X

where and X S are maximum likelihood estimators of and correspondingly. The

estimated probability to fall into each cell is

203

ˆ

ˆ ˆ( ) .

in n

in n n

E

p f d x | x

If ic is the /i M point of the central chi-squared distribution with p degrees of

freedom, 2

p , then the cells are equiprobable under the estimated parameter value, ˆn ,

and ˆ 1/ , .in np M i = 1,...,M Denote nV a vector of standardized cell frequencies

with the components

/ˆ , ,

/

in

in n

N n MV i = 1,...,M

n M

where inN is the number of random vectors 1,..., nX X falling in ˆin nE . The Fisher

information matrix J for one observation can be evaluated as (Moore and

Stubblebine, 1981)

1

1

0

J

0 Q

.

The dimension of J is m m , where ( 1) / 2m p p p is the dimension of .

Q

is the ( 1) / 2 ( 1) / 2p p p p covariance matrix of

11 12 22 13 23 33, , , , , ,...,T

pps s s s s s sr , a vector of the entries of nS (arranged column-

wise by taking the upper triangular elements).

The elements of Q can be written as (Press, 1972)

2 , ij ij ii jjs i, j = 1,..., p, i j, Var

, , ij kl ik jl il jks s i, j,k,l = 1,..., p, i j, k l, Cov

where , , 1,..., ,ij i j p are elements of . For example, in the two-dimensional

case the matrix Q will be (see also McCulloch, 1980)

204

2 2

11 11 12 11 22 11 11 12 12

2

12 11 12 12 22 11 12 11 22 12 12 22

2 2

22 11 22 12 22 12 12 22 22

, , 2 2 2

, , 2 2 .

, , 2 2 2

s s s s s

s s s s s

s s s s s

Var Cov Cov

Q = Cov Var Cov

Cov Cov Var

Following Moore and Stubblebine (1981) for a specified 0 define

0

0 ( )

i

i

E

p f d x | x

,

where

1

0 1 0 0 0 in R : , .Tp

i i iE c c i = 1,...,M

X X X

Define M m matrix 0,B with elements

0

0

,1 .

,

i

ij

ji

pB

p

From Lemma 1 of Moore and Stubblebine (1981) it follows that for any 0 and ic

0

0

0

0

,0, , ,

,, , ,

i

j

i jk

i

jk

p1 i M 1 j p

pd 1 i M 1 j k p

≤ ≤ ≤

where jk are the elements of

1

0

and

1 /2 /2/2 /2

1

1

11/2

/ 2,

2 ...4 2 if is even,

2 / 2 ...5 3 if is odd.

i ic cp p

i i i p

p

p

d c e c e b

b p p p

b p p p

The Nikulin-Rao-Robson (NRR) statistic based on the MLEs can be presented as

(Nikulin 1973; Rao and Robson, 1974; Voinov and Nikulin, 2011)

205

1

2 ˆ ˆ ˆ ˆ ,T T T T

n n n n n n n n n n n n n nY

V V V B J B B B V

(1)

where ˆ ˆ ˆ( ) and ( )n n n n n J J B B .

Unfortunately, in this case, the limiting covariance matrix 1T T I qq BJ B of the

standardized frequenciesn

V , where q is a M-vector with its entries as 1/ M ,

depends on the unknown parameters and, hence, in accordance with Lemma 9 of

Khatri (1968), 2

nY in (1) can not be distributed as chi-square. Moreover, the statistic

2

nY is not distribution-free and so can not be used for hypothesis testing, in principle.

TESTING FOR BIVARIATE CIRCULAR NORMALITY

Kowalski (1970) possibly was the first who considered “some rough tests for

bivariate normality”. Gumbel (1954) considered applications of the circular normal

distribution in “economic statistics”, geophysics and medical investigations.

Following Moore and Stubblebine (1981) consider testing for bivariate circular

normality. The hypothesized probability density function is

1 2 22

1 22

1| 2 exp ,

2f x, y x y

(2)

where 2

1 2, , .T

Using a random sample 1 1, ,..., ,n nX Y X Y , the MLEs

of2

1 2, , and , can be obtained as 1

1 n

j

j

X Xn

, 1

1 n

j

j

Y Yn

, and

2 2 2

1 1

1 ( ) ( )

2

n n

j j

j j

s X X Y Yn

. If

2log(1 / ), 1, ..., 1, i Mc i M i M c , then ˆ 1/inp M . It can be shown that

(Moore and Stubblebine, 1981)

ˆ ˆ1 2

ˆ

0,

/ ,

n n

n

in in

ini

p p

ps

206

where 1 1

2 1 log 1 1 log 1i

i i i i

M M M M

. From this it follows

that the matrix nB is

1

2

0 0 /

0 0 /

0 0 /

n

M

M s

M s

M s

B .

(3)

Since the estimate nJ of the Fisher information matrix for the family (2) is (Moore

and Stubblebine, 1981)

2

2

2

1/ 0 0

0 1/ 0 ,

0 0 4 /

n

s

s

s

J

(4)

then

2

1 2

2

2

0 0

( ) 0 0 .

0 0 4

T

n n n

i

s

s

s

M

J B B

(5)

Denoting

1

1

/ /, ..., , ...,

/ /

T

Tn Mn

n M

N n M N n MN N

n M n M

V , where

, 1,..., ,jnN j M is the number of 2 2

2

1, 1, ..., ,i i id X X Y Y i n

s

that

fall into the interval 1[ , ), 1, ..., ,j jc c j M the statistic (1) is easily derived as

207

2

2 2

21 1

1

4

M M

n i i iMi i

i

i

MY N N

M

.

(6)

Note that formula for nR (denoted as 2

nY in the current paper) given by Moore and

Stubblebine (1981), p.724, is not correct. The correct formula is

222

1 12

1

4

M M

n i in iMi i

i

i

MR N N

n M

.

The second term of 2

nY in (6) recovers information lost due to data grouping. Another

useful decomposition 2 2 2

n n nY U S of 2

nY has been proposed by McCulloch (1985).

In 2 2 2

n n nY U S the first term 2

nU is the Dzhaparidze-Nikulin (DN) statistic

(Dzhaparidze and Nikulin, 1974)

2 1ˆ ˆ( ) ,T T T

n n n n n n n n nU V I B B B B V

(7)

and the second term is

2 2 2 1 1ˆ ˆ( ) ( ) .T T T T

n n n n n n n n n n n n n nS Y U V B J B B B B B V

(8)

McCulloch (1985), theorem 4.2, showed that if rank of nB is s, then 2 2 and n nU S are

asymptotically independent and distributed in the limit as 2 2

1 and M s s respectively.

Since the first two columns of the matrix nB in our case are columns of zeros and the

rest are linearly dependent, the matrix nB has rank 1. From the above it follows that

1( )T

n n

B B does not exist, but, using well known facts from the theory of multivariate

normal distribution (Moore, 1977, p.132 ), we may replace

1 1( ) T

n n

A B B by ( )T

n n

A B B , where

208

A is any generalized matrix inverse of A . It can be computed, e.g., by using

singular value decomposition. So, for testing two-dimensional circular normality with

random cells ˆin nE we may use: the NRR statistic 2

nY defined by (1), the DN

statistic

2 ˆ ˆ( ) ,T T T

n n n n n n n n nU V I B B B B V

(9)

where I is the M M identity matrix, and

2 2 2 1ˆ ˆ( ) ( )T T T T

n n n n n n n n n n n n n nS Y U V B J B B B B B V

(10)

which have asymptotically2 2 2

1 2 1 , and M M distributions respectively.

From (3) it follows that

0 0 0

0 0 0

0 0

T

n n

a

B B ,

(11)

where 2

21

M

i

i

Ma

s

. From the singular value decomposition it follows that

0 0 0

0 0 0

0 0 1/

T

n n

a

B B .

(12)

After simple matrix algebra one gets:

2

12 2

21

1

M

i iMi

n i Mi

i

i

N

U N

,

(13)

209

and

2

2

12 2

1 1

4

4

M

n i iM Mi

i i

i i

S N

M

.

(14)

It is well known (see, e.g., Greenwood and Nikulin, 1996) that chi-squared type

statistics attain their corresponding limit distributions if expected cell counts are more

than or equal 5. To check this for our case we simulated expected values of statistics

(6), (13), and (14) for expected cell counts from 1 to 20 ( M = 10) (see Fig 1).

FIGURE 1: AVERAGES OF Y2 (10), U2 (13), AND S2 (14) AS FUNCTIONS OF

n

From this figure we see that if n is more than or equal 35 (expected cell count equals

3.5) then the expected values of tests (6), (13), and (14) approximately equal to 9, 8,

and 1, as it should be for M=10 if the theory is valid.

To investigate power of tests (6), (13), and (14) consider first their simulated

distributions under the null hypothesis (2). Our simulation shows that probabilities to

fall into rejection region of the level 0.05 differ from Type 1 error of the same

level no more than on one simulated standard deviation (tested for samples of size n =

200 and for the number M of grouping intervals such that expected cell frequencies

are more than or equal to 5).

210

The same is true for n = 100 if 10M . This permitted us, when simulating power

under different alternatives, to define rejection regions using critical values of

corresponding chi-squared distributions.

Let the alternative be the two-dimensional standard logistic distribution with

independent components distributed as

1

2

exp3 3

( ) ,

1 exp3

x

l x x Rx

.

Simulated powers of tests (6), (13), (14), and 2

1

M

i

i

ChLeh N

(see Chernoff and

Lehmann, 1954; Moore and Stubblebine,1981, p.721) are shown on Figure 2.

FIGURE 2: SIMULATED POWERS OF TESTS (10), (13), (14), AND

2

1

M

i

i

ChLeh N

AS FUNCTIONS OF M

What do we see from this figure? First of all we see that power of 2

nS is the highest

one and, what is of importance, almost does not depend on the number M of grouping

intervals. Secondly, because of the decomposition2 2 2

n n nY U S , power of 2

nY is more

than that of 2

nU and less than power of 2

nS . The same situation was observed in the

univariate case (see Voinov et al, 2009, 2012). Concerning the Chernoff and Lehmann

211

(1954), and Dzhaparidze and Nikulin (1974) statistics, ChLeh and DN, the following

can be said. Since the famous result of Chernoff and Lehmann (1954) we know that

the Pearson-Fisher statistic 2

1

M

i

i

N

(we denoted it in this paper as ChLeh) does not

follow in the limit the 2

1 M distribution and may depend on unknown parameters.

Roy (1956), Watson (1958), and Dahiya and Gurland (1972) showed that for a

location and scale family, if one will use random intervals, the statistic 2

1

M

i

i

N

will be

distribution free following in the limit the chi-squared distribution, but the number of

degrees of freedom will depend on the null hypothesis. This is exactly the case

considered by Moore and Stubblebine (1981) who proved that under two-dimensional

circular normal distribution the limit distribution of 2

1

M

i

i

N

does not depend on

parameters and follows in the limit the chi-squared distribution with the number of

degrees of freedom that falls between M-2 and M-1. From Figure 2 we see that power

of ChLeh is indeed between powers of 2

nY (M-1 d.f.) and 2

nU (M-2 d.f.). McCulloch

(1985) and Mirvaliev (2001) showed that "the DN statistic 2

nU behaves locally like

the Pearson-Fisher statistic (ChLeh)". In the univariate case we did not see the

essential difference between powers of the DN and Pearson-Fisher's 2

1

M

i

i

N

(Voinov

et al, 2009), but in our two-dimensional case the power of ChLeh is noticeably higher

than that of DN statistic. Still power of those statistics is much lower than that of 2

nS .

This suggests to use 2

nS , if one intends to test for the two-dimensional circular

normal distribution w.r.t. two-dimensional logistic distribution with independent

components using chi-squared type tests.

As another alternative consider the two-dimensional normal distribution with

correlated components. Let the alternative hypothesis be such that 0,0T

and

01

2 1.4

1.4 2.5

.

FIGURE 3: POWERS OF Y2 (10), U2 (13), AND S2 (14) AS FUNCTIONS OF M

212

From this Figure we see that powers of 2

nS and 2

nY , being high enough, are almost the

same (still power of 2

nS is slightly higher than that of 2

nY ), and that power of 2

nU is

much lower as it was expected. We see also that powers of both 2

nS and 2

nY are the

highest and the same is true for M = 2. The same results are obtained if

02

2 1.4

1.4 2.5

.

A COMPARISON OF DIFFERENT TESTS

Let us test the null hypothesis (2) using the modified chi-squired test 2

nS (14), the

multivariate skewness test (Sk) 1,2b of Mardia (1970), p.523, the kurtosis test (Kur)

2,2b of Mardia (1970), p.525, the Anderson-Darling 2A , and Cramer-von Mises

2W

EDF-tests (see Henze, 2002, p.483). Considering the two-dimensional standard

logistic distribution with independent components as an alternative, the following

results (see Table 1) were obtained.

Table 1: POWERS OF S 2n , Sk, Kur, A2 AND W2

FOR THE CIRCULAR

TWO-DIMENSIONAL NORMAL NULL AGAINST TWO-DIMENSIONAL

STANDARD LOGISTIC DISTRIBUTION WITH INDEPENDENT

COMPONENTS. ERRORS ARE CONSIDERED TO BE ONE SIMULATED

STANDARD DEVIATION

213

Test Power 2

nS 0.609 0.005

Sk 0.357 0.006

Kur 0.832 0.005 2A 0.668 0.009

2W 0.671 0.010

From Table 1 we see that the Mardia's test 2,2b is the most powerful for the particular

null and alternative hypotheses. At the same time we have to note that the application

of 2A and

2W is more difficult, because one has to define critical values of those tests

by simulation.

Consider now power of different tests for the circular two-dimensional normal null

distribution against two-dimensional alternative with correlated components. Let

alternatives be two-dimensional normal distributions with the zero vector of means

and covariance matrices 01 02 and . Results of our simulation study are summarized

in Tables 2 and 3.

TABLE 2: POWERS OF S 2n , Sk right, Sk left, Kur, A2 AND W

2 FOR THE

CIRCULAR TWO-DIMENSIONAL NORMAL NULL AGAINST TWO-

DIMENSIONAL NORMAL DISTRIBUTION WITH THE COVARIANCE

MATRIX 01Σ . ERRORS ARE CONSIDERED TO BE ONE SIMULATED

STANDARD DEVIATION

Test Power 2

nS 0.485 0.008

Sk right 0.027 0.002

Sk left 0.813 0.005

Kur 0.182 0.005 2A 0.622 0.013

2W 0.622 0.012

Table 3: POWERS OF S 2n , Sk right, Sk left, Kur, A2 AND W2

FOR THE

CIRCULAR TWO-DIMENSIONAL NORMAL NULL AGAINST TWO-

DIMENSIONAL NORMAL DISTRIBUTION WITH THE COVARIANCE

214

MATRIX 02Σ . ERRORS ARE CONSIDERED TO BE ONE SIMULATED

STANDARD DEVIATION

Test Power 2

nS 0.486 0.008

Sk right 0.026 0.002

Sk left 0.817 0.008

Kur 0.180 0.006 2A 0.617 0.010

2W 0.618 0.010

In those Tables by "Sk right" and "Sk left" we mean the skewness test 1,2b of Mardia

(1970) applied for right-tailed and left-tailed rejection regions correspondingly. From

Tables 2 and 3 we see, first, that all tests considered make no difference between

alternatives with positive 01( ) and negative 02( ) correlation. Secondly, tests "Sk

right" are biased for right-tailed rejection region. This contradicts to the opinion of

Mardia (1970), p.523. See also Henze (2002), p.474. We see that, if considered

alternatives are fixed in advance, then power of "Sk left" will be the highest, but one

has to know in advance that test 1,2b is biased for the right-tailed rejection region. One

sees also that power of "Kur" is noticeably lower than that of the chi-squared type test

2

nS , and that powers of 2A and

2W are higher but comparable with that of 2

nS .

CONCLUSION

Among all modified chi-squared tests for the two-dimensional circular normality

considered in Section 3 the test 2

nS possesses the large enough power that is more

than that of NRR 2Y and DN

2U tests. The same results were observed in the

univariate case (Voinov et al., 2009, 2012), but in the two-dimensional case of the

circular null normality power of 2

nS almost does not depend on the number of

equiprobable grouping intervals. This is an evident advantage because in the

univariate case it is not easy to define the optimal number of grouping intervals (see,

e.g., Greenwood and Nikulin, 1996).

To characterize anyhow the dependence of tests' power on an alternative hypothesis

consider ratios of powers of tests considered in Section 4. By Ratio we shall mean,

e.g., the ratio of power of 2

nS for logistic alternative to that for the two-dimensional

215

normal distribution (we always divide the large value by a small one). Using Tables 1,

2 and 3, the following Table 4 can be constructed.

TABLE 4: RATIOS OF POWERS FOR S 2n , Sk, Kur, A2 and W2

Test Power 2

nS 0.609/0.485=1.25

Sk 0.815/0.357=2.28

Kur 0.832/0.181=4.6 2A 0.668/0.619=1.08

2W 0.671/0.620=1.08

From Table 4 we see that the2

nS , 2A , and

2W tests are, in some sense, much less

sensitive (Ratio = 1.08, and 1.25) to alternatives considered. We cannot conclude

that2

nS , 2A and

2W tests are the “omnibus" tests because many other alternatives

have to be considered, but w.r.t. the logistic and two-dimensional normal alternatives

they look more preferable than other tests, if, of course, those alternatives are

considered to be unknown.

At this point we also would like to mention the following. The standard deviations of

power estimates of 2

nS , Sk and Kur for the logistic alternatives are comparable, and

those deviations for 2A and

2W are approximately twice larger. For the two-

dimensional normal alternative with 02 the standard deviations of power estimates of

2

nS are even 1.56 times less than those for 2A and

2W .

As an overall conclusion we would like to say that 2

nS test is quite comparable with

EDF tests and even possesses some advantages. One does not need to simulate critical

values to define rejection region, because for 2

nS test these are critical values of the

chi-squared probability distribution with 1 d.f. Another advantage is that there is no

problem with defining the optimal number of grouping intervals. Concerning Mardia's

skewness and kurtosis tests, we do not recommend them for applications because of

biasedness of the tests based on multivariate skewness.

216

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219

CASE STUDY OF UBON RATCHATHANI RICE FARMERS: THAI

GOVERNMENT’S RESPONSIBILITY IN SUPPORTING THE EXPORT OF RICE

Rachaya Indanon

Management Faculty

Ubon Ratchathani University

Warin Chamrap District

Ubon Ratchathani Province, Thailand, 34190

[email protected]

ABSTRACT

Thailand is the biggest rice exporter in the world market. However, Thai farmers, the rice

producers, receive less benefits from the continuously increasing price of the rice products.

Most of the farmers do not export by themselves. According to the research survey, more

than 90 percent of the farmers in Ubon Ratchathani (province in Thailand) do not have the

knowledge and ability to export. This case study explains how the Thai government should

support the Thai farmers to receive more benefits from exporting the rice. The results show

that the Thai government can act as a key organization to fairly allocate benefits among

stakeholders, such as farmers, middlemen, and exporting companies along with the rice

private organizations. The Thai government also should integrate the different government

sectors to smoothly enhance the farmers‟ productivity and quality.

INTRODUCTION

North-Eastern Thailand is an important area for the production of rice, a significant

agricultural product for the country in terms of consumption and export. It is also a major

source of high quality rice such as Jasmine rice for export (Wijnhoud, Konboon, and Lefroy,

2003). In 2006, Ubon Ratchathani, a province in this area, produced 11.88 tons of good

quality Jasmine rice from 24,764 rai of land in 2005. Leading areas of Jasmine rice

production in Ubon Ratchathani were Kudkhawpun, Muangsamsib, Dechudom, Buntharic,

Sumrong, Piboonmungsahan, Trakanpudpon, Srimungmai, Nayia, and Luasuacoke

(Theerapongthanakorn, 2006).

Jasmine rice (Thai Hom Mali) is a soft, fragrant, delicious rice popular domestically

and internationally, and represents 40.22 percent of Thailand‟s exported rice (Department of

Trade Negotiation, Ministry of Commerce; The Office of Agricultural Economics (OAE),

Ministry of Agriculture and Cooperatives of Thailand, 2006). Its export is worth more than

20,000 million baht per year (Krungthepthurakit, 2007). Major export markets are the

European market, United States, Canada, Africa, China, Hong Kong, Malaysia, Taiwan,

220

Brunei, and Singapore (Rice Trade Management Unit, Department of Foreign Trade, Ministry

of Commerce, 2010). Jasmine rice for export accounted for 40 percent per year of total

production and the rest was for domestic consumption. Jasmine rice from Ubon Ratchathani

constituted the highest proportion of rice for export (http://Department of Foreign Trade,

Ministry of Commerce, 2010).

Foreign demand for Thai Jasmine rice increased from 60,282 million baht in 2008 to

68,578 baht in 2009, a rise of 13.76 percent.

TABLE 1 THAILAND’S EXPORT OF JASMINE RICE

Value:millionsbaht

2004 2005 2006 2007 2008 2009

35,572 34,904 40,341 47,988 60,282 68,578

Source: The Office of Agricultural Economics (OAE), Ministry of Agriculture and

Cooperatives of Thailand

Although the export market continues to grow, Thai farmers receive few benefits. Most

do not export by themselves and even in Ubon Ratchathani, an area with an integrated

network of agricultural workers and rice mill associations, exports are via middlemen or

export companies. Only one agricultural institution in Ubon Ratchathani, the Progressive

Farmers Association in Trakanpudpon district, handles its own export affairs.

This case study investigated ways in which the Thai government can assist Thai

farmers to receive more benefits from exporting rice. The study had four specific objectives.

The primary objective was to compare farmer groups involved in direct export with those

involved in indirect export. The second objective was to examine factors related to Ubon

Ratchathani farmer groups‟ capability in exporting Jasmine rice. Examples of these factors

were production costs and efficiency, financial funds in marketing operation, export

knowledge, and export capability. The third objective was to investigate problems of and

obstacles to Ubon Ratchathani farmer groups in exporting Jasmine rice. The final objective

was to study government support for Thai farmers to receive more benefits from exporting the

rice. .

The following section provides an overview of Ubon Ratchthani farmers‟ institutions,

Thailand rice production, the rice market, competition in the world rice market, and rice

exporters‟ government policy, theories, and conceptual framework. Section 3 demonstrates

methodology. Section 4 shows the results of the case study. Finally, section 5 presents

discussion and conclusion.

http://department/

221

AN OVERVIEW

Farmers’ Institutions

Farmers‟ institutions in Ubon Ratchathani are classified into agricultural groups and

cooperative agricultural groups. Some of the agricultural groups coordinate and cooperate

with entrepreneurs and others have their own rice mills.

TABLE 2 FARMERS’ INSTITUTIONS

Farmers’ Institutions Number Responsible Units

Agricultural groups 100 The Office of Agriculture, Ubon

Ratchathani

Cooperative agricultural

groups

47 The Office of Cooperatives, Ubon

Ratchathani

Source: The Office of Agriculture, Ubon Ratchathani, The Office of Cooperatives, Ubon

Ratchathani, 2010

Rice Production

North-Eastern Thailand is responsible for the production of 82 percent of Thailand‟s

Jasmine rice. The most important provinces are Ubon Ratchathani, Amnat Chareon, Roi-Et,

Yasothorn, and Srisaket (Economic Agricultural Department, 2006). North Thailand accounts

for 11 percent of Jasmine production (Luawmek, 2008). Organic Jasmine rice is found in this

region, providing more produce per rai and improving the soil conditions

(Theerapongthanakorn and Namdang, 2006). In some Western countries, it is also more

acceptable.

Inputs of rice production are classified into tradable inputs, such as imported

fertilizers and pesticides, and non-tradable inputs, such as land, labor, and local capital (Yao,

1997). According to Sudanich (2002), inputs that were important to Thai farming were

capital, labor, chemical fertilizers, pesticides, and technology such as harvest tractors. Thai

farmers have incurred higher costs due to their use of pesticides and chemical fertilizers rather

than using organic fertilizers. Farmers‟ sources of funds are Bank for Agriculture and

Agricultural Co-opertives, merchant, and relatives (Sudanich, 2002).

The most popular rice for trading is Jasmine Khor Kor 105 and Sticky Rice Khor Kor

6 is popular for their consumption (Sudanich, 2002)

Studies of farmers in Tumbol Bungngam, Tungkuawluang District, Roi-Et Province

showed that growing rice in 10 rai lots provided higher yields per rai than in larger areas

because farmers were able to take care of all factors related to productivity (Sudanich, 2002).

Productivity of Jasmine rice in Thailand increased from 6.42 tons in 2005 to 6.49 tons

in 2006. Seventy percent of Jasmine rice is exported and thirty percent is for internal

consumption in 2006 (The Office of Agricultural Economics (OAE), Ministry of Agriculture

and Cooperatives of Thailand, 2006).

222

Rice Market

Marketing channels of Jasmine rice involve the domestic and foreign markets

(Patthanapongpaiboon, 2003). Thai farmers have several ways to sell their rice in the

domestic market. They might sell their produce direct or indirectly to agricultural

cooperatives, rice mills, local merchants, or middlemen. In the case of export produce, most

farmers sell through rice mills, middlemen, or export companies. Few of them handle the

exporting themselves.

In the world market, important importers of Jasmine rice are the European countries,

the United States, Canada, Africa, and Asian countries (Rice Trade Management Unit,

Department of Foreign Trade, Ministry of Commerce, 2010).

Competition

Competition in the world rice market is intense. The dominant rice exporters are

Thailand, Vietnam, and India, their exports accounting for 60 percent of global exports

(Headey, 2010). Thailand is the largest rice exporter even though its rice production ranks

fourth behind China, India, and Vietnam (Co and Boonsarawongse, 2007; Food Institution,

2007). Its rice comprises around 30 percent of global exports (Headey, 2010) and important

competitors of Thailand are Vietnam, India, and Pakistan (Co and Boonsarawongse, 2007,

Hansutthiwarin, 2004).

Vietnam is a crucial competitor of Thailand and enjoys the advantage of low costs

due to thegovernment‟s support to reduce the cost of production via the provision of

materials, equipment, and/or subsidized funds. Therefore, Vietnam uses price strategy to

compete in the world market since its costs are lower than other rice exporters (Luawmek,

2008). However, Vietnam‟s rice quality is lower than Thailand‟s.

Rice Price in the World Market

The international rice price is influenced by demand and supply, government

intervention, export volume, rice quality, slow yield growth, macroeconomic imbalance, and

speculation (Headey, 2010; Co and Boosarawongse, 2007).

Basically, the price is determined by demand and supply in the rice market. If there is

more demand than supply, the price rises. For example, Thai farmers receive a low price at

the beginning of the harvest season because there is a large amount of produce in the rice

market. In contrast, they prefer to sell at the end of the farming season, during July to

October, because the price is higher. However, occasionally, governments intervene in the

rice market. To control price fluctuations in the domestic market, governments extract surplus

supply in the domestic market and may promote export. Governments may also influence the

rice price in the international market by restricting exports, leading to an increase in price. It

should be noted that governments sometimes restrict rice exports because of their desire to

provide food security in their countries. Import surges are also important direct determinants

of increases in rice price. The improvement in rice quality is another factor to increase rice

223

price in foreign markets as importing countries often specify high quality standards for

imported rice.

The rice price is also affected by other uncontrollable factors (Headey, 2010). If rice

production has a slowing yield growth, sometimes caused by drought, this reduces the supply

of rice and increases the price in the world market. In addition, macroeconomic imbalance,

such as different interest rates among countries, could cause currency depreciation in major

developed countries and increase the rice price. Moreover, if the information related to the

true levels of rice stocks is unreliable, speculators tend to panic buy, and this pushes up the

rice price.

Government Rice Export Policy

A government‟s policy regarding the export of rice is an important factor in its

competitive capability in the world rice market. In the past, governments pursued

protectionist policies that aimed to guard their producers against international competition,

correct market failure, such as surplus agricultural supply, provide food security to the poor,

and raise national revenue (Choeun, Godo, and Hayami, 2006). Today, governments around

the world favor freer trade policies to encourage international trade, seeking to provide the

best choices to consumers, maximizing international trade, and providing food security to

their own populations. These policy choices have been the rational responses to an array of

political lobbying pressures from vested interest groups, including urban consumers,

industrialists, and labor unions that may lead to a reduction in the social welfare of the nations

(Choeun, Godo, and Hayami, 2006).

Government intervention in the rice market affects private production, prices, and

market demands, and benefits exporter countries in the following ways:

1. Production policy. Normally, government production policies increase

productivity, reduce costs, and improve rice quality to meet GAP1 of export markets. The

Thai government provides farmers with knowledge and financial assistance to improve

farmers‟ rice productivity and standard of product, and reduce costs. For example, money is

used to train farmers and extension workers in appropriate nutrient management (Wijnhoud,

Konboon, and Lefroy, 2003). Similarly, the Vietnamese government exempts imported inputs

used to produce exports and allow farmers to exchange, transfer, lease, inherit, and mortgage

land, leading to a growth in rice production, improvements in cropping intensity, and

reduction in costs of production and exports (Ryan, 2002). The Vietnamese government has

also commenced cultivation of hybrid rice.

A recent study showed that agricultural policy distortions influence rice productivity

(Rakotoarisoa, 2010). It was found that high levels of rice subsidies and protection in

developed countries combined with taxation of rich farming in developing countries widened

the gap in rice productivity between developed and developing countries (Rakotoarisoa,

2010). Developed countries, such as Australia, Italy, Japan, Korea, and the United States,

heavily subsidized their rice production and export, setting high and numerous import

protections. A second group of countries consisting of China, India, Vietnam, Thailand,

Pakistan, Argentina, Columbia, Egypt, Guyana, Myanmar, Suriname, and Uruguay, applied

few producer subsidies but often taxed their exporters. A third group of countries, composed

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of mostly low income countries such as Bangladesh, Brazil, Cambodia, Guinea, Indonesia,

Iran, Laos, Madagascar, Mali, Malaysia, Nepal, Nigeria, Peru, Philippines, Sri Lanka, and

Tanzania, often taxed their rice production and export. Rice productivity was highest in the

group of developed countries and lowest in the third group made up of low income countries.

2. Agricultural diversification policy. Currently, many countries support farmers to

diversify their plantings to include rubber and crops suitable for making bio-fuels, leading to a

reduction in the total area used for rice and rice production (Headey, 2010). Rice supply in the

world market reduces resulting in a price increase.

3. Free trade policy. The agricultural sector has lagged behind other sectors in the

free trade process. Policymakers are reluctant to move rapidly to free trade in rice because

they are concerned about the stability of the domestic price and a strong demand desire for

national self-sufficiency as a route to food security (Dawe, 2001). Dawe explained that large

adjustments in price of rice can lead quickly to political instability and governments might be

more willing to accept higher levels of imports if adequate supplies of rice can be easily

obtained on the international market. Dawe believed that, under free trade, domestic prices of

rice were influenced by world prices and speculation of private traders and speculators.

However, other studies showed that government policies of open borders or import relaxation

offered a financially inexpensive means of reducing the domestic consumption and price

volatility of staple foods (Sanogoand Amadou, 2010; Dorosh, Dradri, and Haggblade, 2009;

Ryan, 2002; Dorosh, 2001). These studies found that private traders enjoyed the freedom to

import and export agricultural products when market conditions permitted and that free trade

allowed domestic markets to moderate the demand and supply of rice, and the price. If

governments restricted import or closed borders, this might lead to a reduction in

consumption and expensive rice .

AP is a standard for exporting rice. It states all production processes that are required to meet

exporting standards (The Office of Product Standard, Ministry of Agriculture).

the domestic market. Likewise, export restrictions could lead to reduced supply in the world

market and stimulate high prices, and finally to a food crisis (Headey, 2010).

Similarly, export promotions, such as removing export restrictions and export quotas,

reducing export duty, subsidizing, supporting exporters to access foreign markets, completing

trade negotiations, and reducing transportation costs, benefit domestic and international

markets. Vietnam‟s easing of export quotas, reduction of export duty, relaxation of internal

trade, and elimination of price controls assist farm prices and poverty (Ryan, 2002). In

addition to Vietnam‟s welfare gains, the world rice market benefits from that country‟s

relaxed policies, resulting in an increased supply of rice on the world market. In summary,

reductions in import and export restrictions enhance a country‟s competitive capability in the

world market.

4. Internal trade policy. A relaxation of internal restrictions, such as the movement of

rice, price control, and reductions in wholesale taxation, supports free trade and a country‟s

welfare (Ryan, 2002).

5. Government-to-government purchases. These are conducted to support farmers

and exporters and to generate revenue for the countries, and usually occur in times of surplus

supplies.

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6. Rice security stock policy. Governments need to ensure that there are adequate

supplies of rice for internal consumption before selling abroad. At the same time too much

should not be retained as this may affect increases in price (Headey, 2010). Appropriately

sized rice stocks in domestic and world markets act as protection against panic purchases and

price increases.

7. Price stabilization policy. Price stabilization2

benefits consumers, producers, and

the macro-economy (Dawe, 2001). Poor consumers are protected from periods of abnormally

high rice prices ensuring their access to their major staple food and farmers are protected from

periods of abnormally low prices. It is also a crucial policy that maintains stable conditions

for private investment and growth.

In conclusion, rice production is very important to numerous Asian governments

because the process involves many smallholders and the food forms a large proportion of the

diets of millions of people (Headey, 2010; al Timmer, 2009). Therefore, these Governments

normally intervene in the rice trade through export and stock policies to protect their own

people (Headey, 2010). However, such interventions drive up the price of rice on the world

market.

Governments‟ policies regarding the export of rice are viewed as the most important

factor to enhance competitive capability in the world rice market. Governments‟

interventions affect private production, price changes, market demands, and provide

advantages for the exporters. Vietnam provides financial support to its farmers to compete in

the world market. In Thailand, despite increased exports and rice prices on the world market,

farmers do not receive benefits because of their inability to export directly. There is strong

evidence that agricultural factors, such as the government policies and the prices of

agricultural products, are significant in the determination of income equality in Thailand

(Motonishi, 2006). Choeun, Godo, and Hayami (2006) indicated that the Thai government‟s

reduction of rice export taxation distributed more benefits to farmers.

This study investigated the government‟s distribution export benefits to Thai farmers.

__________________________ 2Price stabilization is defined as a reduction in the variability of prices without any change in

the average level of prices. Generally, government stabilizes rice price using taxation or

subsidization (Dawe, 2001).

Theory of International Trade

International trade is defined as the exchange of products and services among

countries and is composed of exports and imports (Hill, 2009).

Neo-classical Theory of International Trade. Heckscher (1919) and Ohlin (1933)

stated that international trade originated from the differences in costs of production of

different countries. If one country has more favorable production factors, such as capital and

labor, and/or has lower production costs than another country, then the first country should

have a comparative competitive advantage regarding production costs (Hill, 2009).

Absolute Advantage Theory. Adam Smith (1776) explained that a country that has

absolute competitive advantage in producing goods through more efficiency resulting in

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higher quality and lower costs than other countries should be producing and exporting the

product to those other countries, thus creating international trade (Hill, 2009).

Comparative Advantage Theory. David Ricardo (1817) explained that each country

should produce and export products that it has the most comparative advantage and import

products that it has the least competitive advantage. This results in the two countries receiving

mutual benefits from international trade (Hill, 2009).

Exporting

Exporting is the process by which companies produce goods and send them for sale in

foreign markets (Ball et al. 2010).

Exporting is classified into direct exporting and indirect exporting (Ball et al.

2010).Direct exporting occurs when a company contacts target markets, governments, and

related people in the foreign markets itself. Exporters need to have a potential in finance,

knowledge, and capability to be successful in international business, making direct exporting

riskier than indirect exporting via an agency that manages the risk for the producer. Export

agencies buy goods from producers at low prices to compensate for this risk and this reduces

producers‟ profits from indirect exporting.

FIGURE 1: CONCEPTUAL FRAMEWORK

International

Trade Theory

Export model

-Direct export

-Indirect

export

Rice world

market

competition

Factors related

to farmer

groups‟ potential

in exporting

Government

policy to support

farmer groups in

exporting

Problems and

obstacles of

farmer groups in

exporting

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METHODOLOGY

Data Collection

Primary data were collected from questionnaires completed by members of farmer

institutions and interviews of leaders of farmer institutions, owners of rice mills, rice

exporting companies, and government officials in the Ministry of Commerce and Ministry of

Agriculture. The questionnaires and interviews focused on Ubon Ratchathani farmer

institutions‟ ability to export Jasmine rice and related government policy. Secondary data

were collected from public and private organizations in Ubon Ratchathani and Bangkok,

international business textbooks, and research journals. Statistical data of rice production,

standards, and farmer institutions were obtained from the Ministry of Agriculture and data

related to exporting from the Ministry of Commerce.

This study involved a total of 19,764 persons including farmers who were members

of farmers‟ institutions in Ubon Ratchathani, and individuals from private organizations, such

as rice mills and export companies, and government organizations related to the export of

Jasmine rice in Ubon Ratchathani. The 717 farmers in this population were randomly selected

by the use of the Taro Yamane formula. There were 11 district farmer leaders, 3 rice mill

owners, the Director of Rice Exporting Association, Director of the Commercial Office in

Ubon Ratchathani, Director of Agricultural Office in Ubon Ratchathani, Director of

Cooperative Office in Ubon Ratchathani, Director of the Office of Product Development,

Ministry of Agriculture, and Director of the Office of Rice Administration, Ministry of

Commerce.

The study areas were Bangkok, Ubon Ratchathani and the districts in Ubon

Ratchathani of Warinchamrap, Trakanpudpon, Kudkuawpun, Mungsamsip, Detudom,

Buntraric, Sumrung, Piboonmungsahan, Nayia, Srimungmai, and Luasuakok.

The study analyzed data qualitatively using content analysis and triangular analysis

and quantitatively via percentages, frequencies, and standard deviations.

RESULTS

The results are derived from the interviews and the questionnaire.

Interviews

The following is derived from data collected from interviews of the people mentioned

above.

Export process of farmer institutions

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Most farmer institutions in Ubon Ratchathani export Jasmine rice through

middlemen, rice mills, and export companies. Two farmer institutions, Development

Agricultural Group and Progressive Agricultural Group, arrange their own export of rice. The

Development Agricultural Group in Warin Chamrap sells their rice to an export company

owned by Wanlop Pitchpongsa, Director of Organic Agriculture of Thailand. The Progressive

Agricultural Group in Trakanpudpon is the only institution that is able to complete the export

itself. The leader of this group, Montri Kosonlawat, has the language skill and personal

contacts with foreign businesspeople in European markets, and knows the standards required

for successful exporting. His group is able to produce rice, mill and package it, and operate

the export process. In summary, farmer institutions in Ubon Ratchathani export through

middlemen, rice mills, and export companies. Individual farmers sell their produce to

middlemen, rice mills, and government projects.

Farmer institutions’ ability to export Jasmine rice

Most farmer institutions do not have the ability to export Jasmine rice because they

lack knowledge in exporting, marketing, management, negotiation techniques, rice standards,

producing quality rice to meet export standards, and skills in English.

Also, they do not have sufficient funds to accumulate rice and operate the export

process involving buying machines and equipment to transform paddy into rice, packaging,

and other expenses for export operations.

Therefore, at present, farmers are rice producers only, not having the opportunity to

develop their exporter skills. To export, they need to have their own quality production

process, mills, packaging, customs process, and export management with foreign companies.

Factors related to farmer institutions’ ability to export

1. The institution leader needs to have ability as a professional manager. He/she

should have knowledge in exporting and language skills, be able to find foreign markets,

handle trade negotiations, operate the export process, and control production to achieve the

group‟s goals.

2. Farmers have knowledge of exporting, marketing, management, and language to

contribute their ability to develop the groups‟ export capability.

3. Farmer institutions need equipment for exporting, such as milling machines,

equipment to test rice qualities, equipment to grade rice, and refining machines. These

machines and equipment are expensive and most farmer institutions cannot afford them.

4. Farmers are required to produce quality rice to meet export standards. Important

rice importers, such as the European market, United States, Canada, China, Hong Kong,

Malaysia, Taiwan, and Singapore state their rice standard for marketing as GAP. If farmer

institutions could produce rice that meets the standards of GAP, they can sell it at a higher

price. Few farmers know about these rice standards for export.

5. Farmer institutions need capital funds to operate the export process. They need

funds to produce quality rice, invest in mill and export operations, and use as current capital

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for other important activities such as purchasing rice from farmers and accumulating supplies

to meet the orders of foreign markets. The institutions need to purchase rice from farmers

before they sell to middlemen. Such investments require a large amount of money.

6. A strong group network of farmers enhances their export ability. They are able to

purchase a large amount of rice and accumulate supplies to fulfill export orders, increase their

rice productivity and quality, have more power in marketing negotiations with middlemen,

and have higher levels of operation.

7. There needs to be sincere support from government sectors, including the Ministry

of Agriculture and Ministry of Commerce. The Thai government should embrace stable

policies and measures to provide consistent development of farmers‟ ability in production and

export. Also, private sectors should provide opportunity for farmer institutions to export by

opening the export process and supplying information about exporting. There should be a

genuine integration and distribution of benefits among stakeholders such as farmers,

middlemen, rice mills, and export companies.

Problems and obstacles of farmer institutions in the export of rice

1. Farmer institutions lack leaders who are knowledgeable and capable in exporting

and professional management. They need leaders who have skills in language, and knowledge

of exports and trade negotiations.

2. Farmers lack knowledge about exporting, management, language skills, global

information, and capital funds in export operations.

3. Farmer associations have several weaknesses. Farmers‟ lack of knowledge means

that they sometimes hire a manager for their associations. However, the farmers often face

problems of non-professional managers, and investigations of associated matters are

impracticable due to the farmers‟ lack of knowledge. It is becoming increasingly common

that farmers‟ children are not willing and/or able to take care the family businesses, most

preferring to work in the big cities.

4. Local entrepreneurs and leaders of farmer institutions lack confidence in exporting.

5. The government sector is not able to develop managers for farmer institutions

because it cannot find persons suitably qualified.

6. Most farmers cannot produce sufficient rice to meet export standards. Major export

markets, such as the European countries, Singapore, and United States, specify and accept

different rice standards. This causes difficulties for the farmers because they do not know the

appropriate rice standards for export or the quality of Jasmine rice.

In addition to the problem of farmers lacking knowledge about the standards of rice,

Thai farmers have also lowered their rice standards. In the past, Thai farmers planted rice

using a natural process and equipment and harvested the rice manually. Today, they use more

chemical products, technology, and machines in planting and harvesting the rice. The

chemical products destroy the soil and affect the quality of the rice. Harvesting machines also

cannot grade quality rice because it indiscriminately cuts ready rice and unready rice. Finally,

high quality rice requires a high quality rice mill process.

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Therefore, producing rice of a sufficiently high standard to meet export requirements

must begin with farmers and also relates to rice mills and exporters. Governments, at first,

need to develop farmers to produce good quality rice.

7. Farmer institutions do not have enough productivity volume for export orders.

Thus, it is difficult for groups to expand into exporting.

8. Most farmer institutions cannot access exporters through the many middlemen

between them and exporters. Only big export companies approach farmers, leaving many to

try to access exporters directly in the search for more benefits from rice exporting.

9. Most farmer institutions cannot access Ministry of Commerce, limiting their

opportunities to receive knowledge and benefits from the Ministry‟s work.

10. Farmer institutions do not receive sincere support from government and private

sectors. The government does not have stable policies for farmers and lacks integrated works

among government‟s units. Private sectors often set up obstacles to farmers‟ access to the

export process and cover important information such as rice prices. Generally, private

organizations, including export companies, shipping companies, and middlemen, work

together for their own benefits.

11. Groups and networks of farmers are not strong. Members often withdraw from

their groups for personal reasons and benefits. Farmers might quickly sell rice to middlemen,

rather than to their group, to solve problems of personal debt and may receive a better price

offering from the middlemen. In addition, farmers prefer chemical farming to organic farming

because of the effort in the latter.

These limitations indicate that farmers will not be directly involved in export but will

continue to play the role as rice producers.

Government policy

There are a number of important polices of the Thai government aimed to support

stakeholders in export businesses. These include:

1. Revenue insurance project. The Thai government created this project in 2009 to

solve problems experienced by a previous scheme, the rice deposit project. Through the

revenue insurance project, farmers can receive a guaranteed rice price based on the

government‟s announced price. If the market price differs from the announced price, farmers

receive compensation for the difference in prices. Farmers are required to register with the

government‟s units and specify a period of insurance.

The revenue insurance project benefits all stakeholders, especially farmers as all

registered farmers receive a guaranteed and fair price for their rice. In contrast, the rice

deposit project did not cover all farmers, some selling their rice to middlemen because they

were not able to afford transportation costs involved in the delivery of their rice to specified

places. The revenue insurance project does not require farmers to deliver their rice to

specified places and they receive compensation as soon as there is difference between the

announced and market prices.

Also the revenue insurance project allows middlemen, rice mills, and export

companies to trade rice at the market price regularly so that they can receive normal profits.

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2. Road show project. The government operates the road show project to introduce

rice mills and exporters to foreign exporters and helping them in trade negotiations.

3. Reduction of export and import restrictions. Thailand has for several years

removed export restrictions to support free trade. One of the measures involves the removal of

export duty for rice exporters, benefitting all stakeholders. In contrast, the existence of export

duties usually means that the export companies pass this cost onto rice mills, middlemen, and

farmers, the last group being the poorest with little power.

The government has also removed and/or reduced some tariffs and non-tariffs for rice

import. These measures allow the government to increase its rice stock, exporters to be able to

sell more rice, and Thai consumers to have more choice in the domestic market. However,

these measures create more competition in the domestic market, affecting the benefits of the

middlemen and rice mills. It should be noted that this competition might affect exporters if

some traders import rice into Thailand at low costs and export the rice to foreign markets at a

lower price than Thai rice.

4. Price stabilization. The Thai government pursues price stabilization to control price

in the domestic market. This policy benefits consumers, farmers, and the Thailand economy.

Generally, the government controls the internal supply of rice and international trade volume.

If there is an over-supply in the domestic market, the government extracts some from the

market. To control international trade volume, the government might use export quotas or

tariffs. In addition, the revenue insurance is another project to stabilize the price of Thai rice.

5. Rice stock policy. The Thai government maintains levels of rice stock to ensure

that Thai consumers have enough rice to consume. Surplus rice is allowed to be exported to

foreign markets. This benefits consumers‟ and farmers‟ welfare. The rice stock policy is

parallel to the price stabilization policy, ensuring the rice price and security of consumption

for farmers.

Thailand’s difficulties in exporting Jasmine rice

Thailand is faced with several problems in the export of Jasmine rice. These include:

1. Increased numbers of Jasmine rice producers in the world rice market, such as

Vietnam, Cambodia, and China. China has announced that it will produce enough Jasmine

rice in 3 to 5 years to allow it to stop imports from Thailand.

2. Thailand‟s policymakers and marketing makers are not integrated in their

operations, affecting the efficiency of the operation of exports.

3. Policy inconsistency. Thailand often has problems of inconsistency of policies.

Changes in government often result in changes of rice policy.

4. Thailand has difficulty in improving the quality of rice export.

5. Traders in the foreign markets mix artificial Jasmine rice with the Thai Jasmine

rice product and then sell it on international markets. This ruins the reputation of Thai

Jasmine rice, causing confusion for buyers and affecting future developments.

RECOMMENDATIONS TO ASSIST FARMER INSTITUTIONS TO OBTAIN

BENEFITS FROM THE EXPORT OF RICE

232

In the short term, the Thai government should distribute benefits to all related

stakeholders, export companies, rice mills, middlemen, and especially farmers. Farmers are a

group that has lower economic welfare and poorer negotiating power than other groups. As

their export role is limited, the government should train them to be the producers of the best

rice that meets export standards.

Today, the government has a clear policy to distribute benefits to farmers through the

revenue insurance project and the road show project. Farmer groups should also be

encouraged to coordinate with rice mills and rely on them in this short-term period. Rice mills

should act as farmer leaders in this project because farmer groups do not have the export

capabilities. Farmers should produce GAP quality rice and sell it to rice mills which then

complete the GMP3 standard and export processes. Rice mills usually operate through

exporting companies and do not directly export through the road show project because of

language difficulties.

In addition, the government should establish a training project that joins farmers with

export companies, rice mills, middlemen, consumers, and academics to integrate and

distribute benefits among stakeholders in the short- and long-terms.

In the long term, the government should have projects to develop farmer groups‟

capabilities in exporting rice as follows:

1. Leaders of farmer institutions and farmers should be trained in exporting,

marketing, management, and English language, to operate their own marketing activities, and

be encouraged to be active, independent learners.

___________________________ 3GMP is a standard of rice transforming and packaging. (Source: The Office of Product

Development, Ministry of Agriculture).

2. Farmer should be trained to produce quality rice to meet GAP export standards.

Further, they should be encouraged to market the rice so that they can obtain more benefits.

The training courses should provide fundamentals of developing good quality rice, production

for marketing goals, standard goals, increased productivity, and reduction in costs, and

building strong networks for rice accumulation and stronger price negotiation.

3. The government should create a learning center for farmers to develop their

knowledge of efficient production process and the production of quality rice.

4. The government should assist farmer institutions and rice mills in recruiting

managers.

5. The government should analyze the strengths and weaknesses of farmer institutions

in a bid to increase their efficiency. In addition, it should support farmers to build more

institutions to increase production efficiency and marketing negotiation

power with middlemen. Farmer institutions should cooperate in planning the production

system to produce quality rice to meet GAP standard and serve market demands. The systems

should include cultivating, harvesting, and milling.

6. The government should develop a network of farmer institutions capable of

directing the export process.

7. The government should support farmers to establish more institutions.

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8. The government should support farmers‟ and farmer institutions‟ access to

financial resources, thus encouraging investment in rice accumulation, equipment, and

machines involved in the export process.

9. The government should support farmer institutions to export by surveying high

productivity districts that produce around 20-30 tons, and then planning for these districts‟

marketing.

10. The government should have stable policies in relation to farmers.

11. Education institutions should promote students to be involved in local farming

and their home provinces. In addition, both the government sector and farmers should

encourage farmers‟ children to assist their parents to continue their farming and associations

with farmer institutions. These students should aim to develop themselves as the new,

professional, and knowledgeable farmer executives. In addition to these government

initiatives, it is recommended that the private sector should provide farmers with

opportunities to learn about exporting rice. Export companies, rice mills, and middlemen

should not block farmers‟ access the export process. Private organizations should also provide

important information in relation to exporting. For example, Mr Wanlop Pitchpongsa has

supported farmers‟ access to the export process for a long time. He makes an initial contract

with an organic farmer association so that the institution learns how to deal with an export

company, coordinates farmers to meet with financial sources and insure debts for the farmer

institution. This supports the farmer institution to accumulate a large amount of organic

Jasmine rice

Questionnaire

Export capability

A total of 717 farmers answered a questionnaire about their capability in exporting.

The results showed that most of them did not have capability in knowledge and/or finance to

successfully operate the rice exporting process.

Export knowledge

More than 90 percent of farmers lacked knowledge of exporting knowledge:

TABLE 3: FARMERS LACK OF KNOWLEDGE OF EXPORTING

Lack of knowledge จ ำนวน ร้อยละ

1. Marketing 675 94.54

2. Exporting 662 92.72

3. English language 661 92.58

4. Management 656 91.88

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5. Others 53 7.42

Factors related to farmer institutions’ capability in exporting

The five factors identified by the farmers as most important in the enhancement of the

farmer institutions‟ capability in exporting were:

1. Capital funds for exporting – ranked first by 71.41 percent.

2. Sincere government support - 69.74 percent.

3. Support of private sector - 59.97 percent.

4. Developing leaders‟ ability - 56.62 percent.

5. Cooperating in rice accumulation - 55.09 percent.

Requirements of farmer institutions in developing their export capability

The five requirements viewed by farmers as the most important in the development of

farmer institutions‟ export capability were:

1. Capital funds for exporting – ranked first by 82.51 percent.

2. Sincere government support - 81.73 percent.

3. Support of private sector - 73.08 percent.

4. Strong network - 71.41 percent.

5. Knowledgeable leaders - 68.20 percent.

Problems of and obstacles to farmer institutions in exporting

The farmers identified the following as the five most significant problems for farmer

institutions in exporting:

1. Lack of government support - ranked first by 69.87 percent.

2. Lack of funds to purchase important equipment - 67.92 percent.

3. Lack of funds to purchase and accumulate rice - 63.46 percent.

4. Lack of private sector‟ support - 63.04 percent.

5. Farmers‟ lack of knowledge - 58.72 percent.

Recommendations for developing farmer institutions’ export capability

The farmers made five recommendations to enhance farmer institutions‟ export

capability. These were:

1. Support farmer institutions to access financial sources – ranked first by 77.13

percent.

2. Support farmer institutions to access foreign markets - 71.97 percent.

3. Training projects for leaders - 69.81 percent.

4. Training projects for farmers - 64.16 percent.

5. Promote cooperation among institutions - 64.16 percent.

SUMMARY OF THE RESULTS

235

Both quantitative and qualitative research showed that most farmer groups in Ubon

Ratchathani did not have ability in the direct export of Jasmine rice. Most farmer groups

exported through middlemen, rice mills, or export companies, there being only one group able

to complete direct export to foreign markets because the group leader had the language skills

and personal contacts with foreigners.

It was found that the important factors related to farmer groups‟ ability in rice

exporting were the group leader who was knowledgeable in exporting and language and was

capable in marketing and trade negotiation. Other important factors for farmers were

knowledge in exporting and ability in marketing trade negotiations. Farmers also needed

capital funds to accumulate rice to fulfill foreign orders and operate the export process. Rice

production must meet export standard requirements. Also, the establishment of new groups

and networks and sincere and continued support from the government and private

organizations were seen as crucial factors to support groups‟ development in exporting. The

lack of these factors led to problems of developing farmers groups‟ ability in exporting the

rice. According to this research, more than 90 percent of farmers in Ubon Ratchathani lacked

these qualification factors and supporting factors, resulting in most farmer groups not being

able to be involved in direct exporting.

Existing government policies include insurance projects for farmers‟ revenue,

providing knowledge about producing quality Jasmine rice, and subsidies for farming. To

promote export, the Thai government relaxes export duties and conducts road shows for

entrepreneurs of rice mills and exporters. However, most policies and measures lack

integration in planning and implementation among related government sectors.

Guidelines to improve farmer groups‟ ability in rice exporting mostly rely on Thai

government support. TheThai government should have several policies and measures to help

farmers to receive more benefits from exporting rice. In the short term, the government can

act as a key organization to fairly allocate benefits among stakeholders, such as farmers,

middlemen, and export companies along with the private rice organizations. This action

should be based on sincere principles and information available to all stakeholders. The

government also needs more policies and measures to support farmers.

In the long run, the government should develop the capability of farmer groups in rice

exporting by providing knowledge and assistance continually. It should develop training

projects for farmers and their leaders about exporting, marketing, language, and rice

production standards for export. The government also needs to assist farmers to access funds

for their farming and exporting. In addition, the government should develop policies and

measures to enhance farmers to develop strong group networks for mutual exporting and

marketing activities. Cooperation among government and private organizations is necessary

to support farmer groups‟ ability in exporting. The Thai government also should integrate the

different government sectors, including educational institutions, to enhancefarmers‟

productivity and quality. These actions in assisting farmers and other stakeholders will

support the export of Jasmine rice through comparative advantages in quality and cost to

Thailand‟s competitors.

DISCUSSION AND CONCUSIONS

236

Discussion

This research provides similar and different results to previous studies. Similar to

Patthanapongpaiboon‟s study (2003), marketing channels of Thai farmers involve the

domestic and foreign markets. In addition, there are similarities in farmers‟ exporting

process. This study also demonstrates similar problems of farmers about production costs and

marketing to the study of Sudanich (2002) and Patthanapongpaiboon‟s study (2003). The Thai

government subsidized policies of rice production and exporting are mentioned in this study

and the study of Wijnhoud, Konboon, and Lefroy (2003). Furthermore, this study shows

similar result to Luawmek‟s study (2008) that Viet Nam has a comparative advantage of rice

price in the world market.

Different results adding to existing evidence of farmers‟ exporting process and

exporting capability are Ubon Rachathani farmer groups‟ ability in exporting Jasmine rice as

a statistical number, factors related to Ubon Ratchathani farmer groups‟ ability in exporting,

problems of Ubon Ratchathani farmers in exporting jasmine rice in details of many aspects.

In addition, this study reveals in details how government policies and projects support farmers

and other stakeholders to export the rice. Comments of all related stakeholders are included

in the results.

This study found that a major policy of the Thai government, the Revenue insurance

project, benefits all stakeholders, especially farmers. However, other policies of the Thai

government had some weaknesses such as production policy and export policy. The Thai

government has not integrated related sectors to assist farmers and cannot solve problems of

high cost and debts due to their production improvement. This has made Thai exports less

competitive in terms of costs compared to Vietnam.

The Thai government‟s policy about free trade supports exporters and other

stakeholders, but not farmers. Policies that remove export duties, subsidies, and trade shows

also assist other groups, but fail to help farmers. There is a clear need to introduce policies

and measures to assist farmers as well as other groups.

The rice security stock policy of the Thai government is admirable because it

maintains a good level of stock to secure internal consumption and controls the stock

compatible with assistance for farmers by extracting surplus rice from the domestic market.

Similarly, the price stabilization policy of the Thai government is also good as it

allows the government to intervene to assist consumers, farmers, and the economy. However,

in the future of Asian free trade, the government might have to rethink its balance between

importing rice and rice stocking. Under the free trade condition, even though Thailand is the

biggest rice exporter who has enough rice to consume in domestic market, it needs to allow

rice importing into its domestic market.

This study was limited by the unavailability of a number of farmers at the beginning

of the rice season to complete the questionnaires.

Conclusions

237

The rice industry has long been a critical player in the Thai economy (Choeun, Godo,

and Hayami, 2006). It provides the main staple food, employs a large portion of the labor

force, and contributes revenue and foreign exchange earnings to the government. Thai rice

exports have grown continually. However, Thai farmers have not always received the

economic benefits from the export of rice and their earning growth is not compatible to export

growth and rice price increases. The Thai government has created some good policies,

nevertheless, there are some weaknesses and incomplete issued are needed to be addressed.

RECOMMENDATIONS

This study makes a number of recommendations. The Thai government has made

efforts to develop farmers‟ knowledge in the improvement of rice productivity. However,

integration of different government sectors is required to further enhance farmers‟

productivity and quality. This would support Thailand‟s comparative advantage to compete in

the world market in term of quality rice in short term and compete with the price strategy in

the long term.

The government‟s actions to distribute benefits to stakeholders, especially farmers,

should be performed as equally as possible. There is a need for private sector involvement in

exports, price control, marketing assistance, information perfection, and stable policy.

The Thai government‟s road show projects for exporters and rice mills are helpful but

they need to be extended to support farmers. In addition, the government should provide

farmers with access to financial sources and information sources on price, food production,

international markets, and public and private sector marketing systems.

Another important policy is the price stabilization policy. The Thai government as a

rice exporter should pursue this policy continually. Price control is necessary to control

demand and supply of rice in the domestic market. Major measures to stabilize prices control

the quantity of international trade and quotas or tariffs (Dawe, 2001).

Furthermore, the government should find a balance between free trade and price

stabilization. Thailand needs to import rice in the era of Asian free trade so the government

needs to carefully determine the rice stock and conduct appropriate measures to stabilize the

rice price. Effects on stakeholders are important factors for the government to consider.

Finally, the government should also provide a stable and credible policy for

stakeholders in rice exporting and assist farmers and other stakeholders continually.

It is suggested that future research related to this area of study should involve pilot

projects in Ubon Ratchathani to promote some areas for rice exporting. This may include

groups of farmers who produce large quantities of rice and wish to be involved in direct

exporting. Other research could investigate and assess government policy in exporting

Jasmine rice.

238

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