AFBE 2010 CONFERENCEPAPERS ISSN 1905-8055 I TABLE OF CONTENTS Roberto Akyuwen, Arifin Indra Sulistyanto, ―THE DYNAMICS OF INDONESIA‘S CRUDE PALM OIL EXPORT‖ 1 Wardis Girsang, ―FOOD SECURITY POLICY: A CASE OF MALUKU ISLANDS, INDONESIA‖ 41 Agustinus Kastanya, ―THE MANAGEMENT OF SUSTAINABLE NATURAL PRODUCTION FORESTS FOR THE MOLCCASN ISLAND GROUPS , INDONESIA‖ 55 A.M. Sahusilawane and Esther. Kembauw, ―INCOME ANALYSIS: A CASE STUDY OF WOMEN SAGO WORKER IN AMBON ISLAND, INDONESIA‖ 70 Lukman Mohammad Baga, Rahmat Yanuar, Feryanto William Karo-Karo, ―THE EFFECT OF THE GLOBAL ECONOMIC CRISIS ON MILK AGRIBUSINESS IN INDONESIA‖ 86 Adrian D. Lubis, ―GLOBAL CRISIS HAS DELIVERED INDONESIA AGAINST THE NEGATIVE IMPACT OF EARLY HARVEST PROGRAM WITH CHINA‖ 95 Tinjung Mary Prihtanti, ―POTENTIAL OF AGRICULTURAL LEADING COMMODITY BUSINESS IN MERAPI MERBABU AGROPOLITAN AREA MAGELANG, INDONESIA‖ 114 Lukytawati Anggraeni, Tony Irawan, Ahmad Heri Firdaus, Amzul Rifin, ―THE CONTRIBUTION OF AGRICULTURAL SUB-SECTOR TO INDONESIAN ECONOMY AFTER ECONOMIC CRISIS‖ 125 Amzul Rifin, ―WHAT DETERMINES THE PRICE OF COOKING OIL IN INDONESIA?‖ 135 Maria, ―SUGAR-TRADING POLICY TOWARD THE AVAILABILITY AND DOMESTIC PRICE, INDONESIA‖ 148 Muhammad Firdaus, ―HOW SEVERELY DID THE GLOBAL ECONOMIC CRISIS AFFECT INDONESIAN AGRIBUSINESS EXPORTS?‖ 163 Firdiyansyah Romadhona and Adeline Puspitasiwi, ―STRATEGY FORMULATION TO TRANSFORM COMPARATIVE ADVANTAGE INTO COMPETITIVE ADVANTAGE AS A RESPONSE OF GLOBAL CRISIS: CASE STUDY AT EMPING MELINJO BUSINESS IN SARI SONO COOPERATIVE , INDONESIA‖ 175 Muhamad Abduh, Roosemarina A. Rambe, ―STUDENTS‘ SATISFACTION LEVEL ON THE ENTREPRENEURSHIP EDUCATION PROGRAMS AT THE BENGKULU UNIVERSITY, INDONESIA‖ 190 II Tsuroyya Tsuroyy, Brian Pranata, and Wahdi S. A. Yudhi, ―PREVENTING THE GROWTH OF CHILD TRAFFICKING: RAISING PUBLIC AWARENESS OF THE IMPORTANCE OF EDUCATION FOR STREET CHILDREN IN INDONESIA‖ 204 Tsuroyya Tsuroyya, Mr Brian Pranata, and Wahdi S. A. Yudhi, ―A GLANCE OF KATHOEY LABORS: IN THE MIDST OF THAI‘S TRADITIONS AND LEGAL AUTHORITIES‖ 213 Suciati Mega Wardani, ―THE REAL SECTOR EFFECTS OF THE ECONOMIC CRISIS AND GLOBAL HEALTH IN SOUTHEAST ASIA: STUDY CASE: INSURANCE MANAGEMENT IN INDONESIA‖ 220 Hastin Umi Anisah, ―THE ROLE OF BANJARESE CULTURE TO IMPROVE PERFORMANCE AND COMPETITIVE ADVANTAGE THROUGH ISLAMIC ENTREPRENEURSHIP AND STRATEGY - SMALL AND MEDIUM ENTERPRISES IN JEWELLERY AND GEM STONES AT MARTAPURA, SOUTH KALIMANTAN, INDONESIA‖ 236 Ningky Sasanti Munir, ―MODEL OF KNOWLEDGE CREATION IN A COMPANY: STUDY AT MODERN COSMETICS COMPANIES IN INDONESIA‖ 248 Rina Oktaviani, Tony Irawan, and Lukytawati Anggraeni, ―THE IMPACT OF FISCAL AND MONETARY POLICY ON INDUSTRY AND INDONESIAN ECONOMY: A COMPUTABLE GENERAL EQUILIBRIUM ANALYSIS‖ 273 Sahnaz Ubud, Marthin Nanere, ―THE ROLE OF SUPPLY CHAIN FLEXIBILITY AND ITS ANTECEDENT VARIABLE IN INCREASING COMPETITIVE ADVANTAGE OF MANUFACTURING INDUSTRIES IN EAST JAVA‖ 293 Brian Arieska Pranata, Ms. Tsuroyya, Wahdi. S. A. Yudhi, ―THE SOCIAL- CULTURAL AND ECONOMIC IMPLICATIONS OF THE PRESENCE OF MOBILE PHONES AMONG OVERSEAS MIGRANT WORKER FAMILIES IN KECOPOKAN HAMLET, EAST JAVA, INDONESIA‖ 313 Lizar Alfansi, Ferry Tema Atmaja, Marthin Nanere, ―THE EXTRINSIC CUES EFFECTS ON PERCEIVED PRODUCT SAFETY‖ 339 Roger C. Smith, ―APPLYING ATTRIBUTION THEORY TO MANAGEMENT CONSULTING AND TO PERFORMANCE PROBLEMS – PEOPLE OR THE SYSTEM?‖ 354 Victor Egan, ―AN EMPIRICAL STUDY OF THE CONTEMPORARY LEGACY OF THE 1994 GENOCIDE ON BUSINESS IN RWANDA‖ 364 Victor Egan, ―BUSINESS CONSTRAINTS AND RECESSIONARY EFFECTS ON SMALL FIRMS IN VIETNAM: A CASE STUDY OF THE RETAIL CLOTHING INDUSTRY‖ 382 III Jiří Strouhal, Jiřina Bokšová, Dana Dvořáková, ―CHALLENGES FOR MEASUREMENT IN ACCOUNTING AFTER THE CRISIS‖ 394 Prasanna.T, ―TOURISM: GLOBAL STATUS AND TRENDS‖ 407 Vivekanand B Khanapuri, Mayank R Khandelwal, ―BRIDGING THE GAP BETWEEN INSTITUTIONS OF HIGHER EDUCATION AND THE INDUSTRY – EXPERIENCE OF A RECOGNIZED INDIAN INSTITUTE IN BRINGING STUDENTS AND INDUSTRY TOGETHER‖ 420 Alexander Josiassen, Megan Willis, Jillian Hamill, Courtney Holmes, Luvna Munisamy, Nella Ortisi , Melissa Popovski, Albert Assaf, ―SOCIAL NETWORKING SITES AND MARKETING OUTCOMES AN EMPIRICAL INVESTIGATION FROM AUSTRALIA‖ 430 Earl Jobling, ―THE BANKING NEEDS OF SMES IN AUSTRALIA: WHAT DO THEY WANT, AND HOW CAN BANKS DELIVER?‖ 439 Filda Rahmiati, Mulyaningrum, Md Nor Hayati Tahir, ―HOW MALAYSIAN MANUFACTURING EXPORTS HAVE REACTED TO THE GLOBAL ECONOMIC CRISIS‖ 452 Guo, Yi Shan, Lina Huang, Lujin, ―SEMIOLOGY SNALYSIS OF KFC‘S ADVERTISING IN CHINA THE VERIFICATION OF THE DECiSION- MAKING MECHANISM, BASED ON CONSUMERS‘ SOCIAL IDENTITY‖ 464 Huang, Lujin, Shan, Lina, Wang, Yibo, ―RESEARCH OF THE RELATIONSHIP BETWEEN CONSUMERS BEHAVIOR AND SELF- IDENTITY OF MIDDLE INCOME EARNERS IN CHINA: USING THE YANGTZE RIVER DELTA AS AN EXAMPLE‖ 478 Philip D. Trebilcock, ―INDONESIAN STUDENT PERCEPTIONS OF AUSTRALIAN HIGHER EDUCATION‖ 493 Julie B. Johnson, ―BUSINESS STRATEGIES ADAPTED FOR SOCIAL BENEFITS AMDIST THE ECONOMIC CRISIS‖ 508 Michael Beacom, Marthin Nanere, ―THE IMPACT OF INTERNET TECHNOLOGIES AND E-BUSINESS APPLICATIONS ON TOURISM ENTERPRISES: A CASE STUDY FROM CENTRAL VICTORIA, AUSTRALIA‖ 521 Abey Kuruvilla, Olakunle Ogunsanya, Dirk Baldwin, ―TRENDS IN ONLINE LEARNING – EXPERIENCES OF AN ACCREDITED BUSINESS SCHOOL IN THE UNITED STATES‖ 550 Malabika Deo, K. Srinivasan, ―EFFECTS OF RECENT GLOBAL MELTDOWN AND MARKET VOLATILITY IN INDIA: AN ECONOMETRIC INVESTIGATION ON S&P CNX NIFTY SPOT AND FUTURES‖ 563 IV Maryono, Jun-Yen Lee, ―CONSUMER PERCEPTION OF CORPORATE SOCIAL RESPONSIBILITY: A CROSS-CULTURAL COMPARISON IN INDONESIA AND TAIWAN‖ 581 Hamed Armesh, Davoud Nikbin, Solmohammad Bastam, ―THE EFFECTS OF SECURITY AND PRIVACY INFORMATION ON TRUST & TRUSTWORTHINESS AND LOYALTY IN ONLINE MARKETING IN MALAYSIA‖ 595 Ali reza hedari, Noor Mohammad Yaghoobi, ―AN EVALUATION OF INDEPENDENT ENTREPRENEURSHIP OBSTACLES IN INDUSTRIAL SMES IN MALAYSIA - A CASE STUDY‖ 610 Marthin Nanere, Lizar Alfansi, Ferry Tema Atmaja, ―ATTITUDES TOWARDS THE EFFECTS OF GREEN PRODUCTS ON THE ENVIRONMENT: AN INDONESIAN CASE STUDY‖ 624 Siriporn Yenpiem, ―NAVIGATING PROCESS OF CHANGE TOWARDS NEW TECHNOLOGY FOR AVIATION‖ 632 Roger J. Baran, ―WHO HAS THE POWER? A STUDY OF DECISION- MAKING INFLUENCE IN AMERICAN FAMILIES‖ 661 1 THE DYNAMICS OF INDONESIA’S CRUDE PALM OIL EXPORT Roberto Akyuwen Senior Lecturer, Finance Training Center Jogjakarta, Ministry of Finance RI Jl. Solo Km 11, Kalasan, Sleman, Jogjakarta 55571, Indonesia Telephone: 62-274-496219, Facsimile: 62-274-497235 Email:
[email protected] Arifin Indra Sulistyanto Senior Managing Director, Indonesia Eximbank, Indonesia Stock Exchange Building Tower II, 8 th Fl., SCBD Jl. Jend. Sudirman Kav. 52-53 Jakarta 12190, Indonesia Telephone: 62-21-5154638, Facsimile: 62-21-5154639 Email:
[email protected] ABSTRACT Oil palm has played an important role in supporting Indonesia’s economy. The main product of oil palm plantation is crude palm oil (CPO) and most of it has been exported to various countries. In 2006, total export volume of CPO reached 12.1 million tons with a value of US$ 4.82 billion. Since 2007, Indonesia has become the main CPO producer in the world, replacing Malaysia. Total production of Indonesia’s CPO in 2007 was 16.8 million tons. This research is aimed at analyzing the dynamics and factors affecting the performance of CPO export. The main tool of analysis is multiple regression by using 38 years of time series data. The other tools are descriptive statistics, tests of statistical significance between two means, and trends. It was found that government policies were not optimum in supporting the performance of Indonesia’s CPO exports. For instance, the government was inconsistent in implementing an export tax and domestic market obligation (DMO) schemes and has made no specific effort to build infrastructure such as export ports and storage tanks which were vitally needed by CPO producers. Furthermore, the government of Indonesia was passive in responding to negative issues and black campaigns launched repeatedly in the international market. At the upstream level, there was no policy synergy between central and local governments in overcoming land certification and permission administration problems in palm oil plantations. The export financing was the most important factor which has a significant and positive impact on Indonesia’s CPO export volume. The other factor was CPO price in the world market. The black campaign has a significant but negative impact. The black campaign launched in the international market and includes negative effects of food containing CPO on consumer health and that the production process of CPO has damaged the environment. The prices of sunflower and soybean oil were the last two factors which have had significant and positive impact on CPO export volume. On the reverse side, however, variables which have no impact on Indonesia’s CPO export volume include domestic price, domestic consumption, CPO production volume, exchange rate, GDP per capita of export destination countries, world crude oil price, and government policy. Although affected by the global crisis, Indonesia’s CPO export still has a very bright prospect in the future due to increasing consumption of various products which were produced by using CPO as a production input. The international demand for CPO will increase in the years to come in line with the growth of world population. 2 Keywords: crude palm oil, production, exports, export financing, CPO price, black campaign, Sunflower, soybean oil prices. BACKGROUND Macroeconomics and international economics textbooks (Appleyard and Field, 1995; Dornbusch, et al. 2004; Krugman and Obstfeld, 2003; Mankiw, 2003; Markusen, et al., 1995) have revealed that inter-countries trading play important roles in today‘s open economy and the globalization era. Export and import activities have provided foreign reserves, investments, and employment opportunities for almost all countries in the world. Exports and imports have also influenced both domestic and foreign policies in many countries (Destler, 2005). Export contribution is even more important for developing countries like Indonesia. Most of the developing countries are heavily dependent on primary commodities exports such as agriculture and mining (Todaro and Smith, 2003). These countries have limited capacity in advanced technology required to produce high value products. In fact, many developing countries have become only the assembling locations for various processing and manufacturing industries from developed countries in order to exploit the comparative advantages in abundant raw materials and cheap labor. In 1990-2006, Indonesia‘s export value was on average $ 53,321.26 million per annum with growth rate of 9.75 percent per annum. At the same time, average import value was $ 35,616.55 million per annum with an annual growth rate of 9.83 percent. Average net export was $ 17,704.71 million per annum with a growth rate of 18.11 percent per annum. Many countries have made an effort to increase export capability and import substitution. According to Krugman (1994), a country should establish its international trade policy alternatives accurately by considering positive and negative consequences. Export promotion policy, in one hand, would encourage a country‘s foreign reserves and investments and create employment. But, on the other hand such a policy could accelerate natural resources depletion. Meanwhile, an import substitution policy could increase domestic industry performance, but some raw materials have to be imported. Destler (2005) pointed out that most countries focused on export promotion rather than import substitution. Developed countries have made serious efforts in expanding markets for their products, while less developed and developing countries focused on improving revenues to provide funds for supporting development activities, reducing budget deficits, and paying out foreign debts. There are two groups of export commodities, i.e. natural oil and gas and non-oil and gas. Non-oil and gas exports contributions tend to increase, while the role of oil and gas exports tends to be stagnant or have lower growth (Jha, 1994; Todaro and Smith, 2003). These results also happened in Indonesia. The annual growth rate of Indonesia‘s non-oil and gas exports was on average 10.96 percent in 1990-2006. Data provided by the National Statistic Agency (BPS) show that non-oil and gas exports in 2006 reached $ 79,589.15 million. Meanwhile, oil and gas export grew by 6.88 percent per annum in the same period. In 2008, non-oil and gas export value was $ 107.8 billion and oil and gas export value was $ 28.96 billion. The performance of exports was influenced by financial and non-financial factors. Financial factors were determined by the availability of funds for export transactions, including funding types and sources. Among relevant terminologies were export credit, export credit agencies, and export credit guarantees and insurance (Gianturco, 2001). In 3 practice, there was an excess supply of funding. The demand for funds from exporters was exceeded by its supply from financing institutions. Non-financial factors were related to government policies, such as regulations, protection, export quotas, and other trade barriers. In addition to that, internal industry factors related to production quality and quantity also influenced the performance of exports. According to the International Finance Statistics (IFS), Indonesia was ranked 30th with a share of 0.83 percent of the total world export market. One of Indonesia‘s fastest growing export commodities was the crude palm oil (CPO). Export volume of CPO was on average 4.12 million tons in 1990-2006 with a growth rate of 22.97 percent per annum. Export volume of CPO reached 12.10 million tons in 2006, ten times higher if compared to export volume in 1990. Vast growing in export volume was followed by export value of CPO. In the same period, annual export value of Indonesia‘s CPO grew by 27.13 percent. Export value in 2005 reached $ 4.82 billion or grew 28.24 percent compared with $ 3.76 billion in 2005. In 1990-2006, the average export value of Indonesia‘s CPO was $ 1.52 billion per annum. The contribution of CPO‘s export value in Indonesia‘s total non-oil and gas exports tended to increase every year. In the period 1990-2006, the contribution of CPO exports was on average 4.17 percent per annum with the highest contribution of 6.15 percent of total Indonesia‘s non-oil and gas exports in 2004. Although, there was a decrease to 5.66 percent in 2005, however, overall, there was a significant contribution of CPO‘s export value, that is about 5 times within 17 years. These facts show the importance of CPO role in Indonesia‘s economy and the role could be even greater in the years to come. The main destination was India with the export volume reached 2.48 million tons or 20.51 percent of the total Indonesia‘s CPO exports (BPS, 2007). CPO‘s export volume to India decreased about 2.98 percent if compared to the export volume in 2005. The decrease was caused by the dynamics of vegetable oils demand, population growth, and the world economic condition. Besides, there was a minimum standard of β-carotene and a higher import tax policy on CPO imposed by the government of India. The second important importer of Indonesia‘s CPO was the European Union with the share of 20.6 percent or equal to 931.000 tons in 2005. Import volume of the EU increased by 19 percent from 2004 and this was caused by the increased usage of palm oil in foods. Palm oil was used more intensively by Europeans to substitute rapeseeds oil which has been used increasingly for biodiesel or bio-fuel. The other important countries included China, Ceylon, and Tanzania. As an exporter country, Indonesia is competing with Malaysia, Nigeria, Thailand, Colombia, Ecuador, and the Ivory Coast. Malaysia was in the first place until 2005 with a total CPO production of 15.38 million tons or 45.24 percent of total world CPO production. Indonesia was in ranking two with total production of 13.80 million tons or 41.20 percent. But, the growth rate of Indonesia‘s CPO production is significantly higher than Malaysia, i.e. 14.72 percent compared to 6.06 percent per annum, respectively. So, since 2007, Indonesia has replaced Malaysia as the biggest CPO producer in the world. The growth of CPO production and export was encouraged by its demand and price which competed with other vegetable oils, such as soybean, sunflower, rapeseed, and coconut oil. CPO price increased constantly in 1990-1998, but then continued to decrease until 2001. After 2001, the trend of CPO prices began to increase again until 2006, except for 2005. The world demand for CPO decreased drastically in 2008 as a consequence of the global economic crisis triggered by the subprime mortgages in the USA in 2007. Economic performance of many countries was slower and the inflation and unemployment rate has 4 increased substantially. Liquidity problems were faced by many financial institutions, such as the bankruptcy of Lehman Brothers in 2008. The level of consumption and imports of developed countries decreased substantially, including the consumption and imports of CPO products from developing countries. More than half of foods and non-foods packaged products in the supermarkets now contain CPO and its derivatives (Chandran, 2009). As the main producer in the world, Indonesia was influenced by the decrease of CPO demand and price. The negative impacts not only hit CPO industries and exporters, but farmers as well. In November 2008, the price of a stem of fresh palm oil (TBS) decreased to 350 rupiahs per kg. In the normal situation, the price of TBS at the farmer level was between 1,400 rupiahs to 1,600 rupiahs per kg. CPO demand and price decreased from mid 2008 to May 2009 and then recovered. According to the Indonesian Exporter Association, CPO export volume in January 2009 reached 1.4 million tons with destination countries including India, China, and EU. In addition, according to the Indonesian Palm Oil Business Federation (GAPKI), CPO price was already stable at the beginning of 2009. Negative impacts also caused by higher dependency of Indonesia CPO industry on the world market, while domestic consumption was only limited. About 70-75 percent of Indonesia‘s CPO production was exported to China, India, and Europe (Kompas, 4 April 2009). The Indonesia CPO producer‘s capacities were supported by abundant production factors. Palm oil plantations were spread in various regions in Indonesia, especially in Sumatra, Java, Kalimantan, and the Papua islands. Besides, there were also potential lands for expansion by more than 50 million hectares. Workers were also available, because various jobs in palm oil plantation only required lower skills of workers. In 2003, the largest palm oil plantation was found in Riau Province, i.e. 1.38 million hectares, followed by North Sumatra Province 0.96 hectares, and South Sumatra Province 0.53 hectares. In 2006, there were 470 palm oil factories spread in 17 provinces with a total installed capacity of 19,852 tons of TBS per hour. The majority of palm oil factories were located in Riau Province (128 units), North Sumatra Province (105 units), and South Sumatra (53 units). Effective capacity of those 470 palm oil factories was about 68 percent or 13,541 tons of TBS per hour (Directorate General of Plantation, 2006). However, until recently, these CPO industries did not have comparative advantage and were not competitive yet. Indonesia‘s CPO trading in world market was very often hampered by negative campaigns (Oil & Fats Internatonal, Dmg World Media, 2008). The development of the CPO industry is influenced by the availability of investment funds and other factors. Sources of funds include banks and non-bank institutions, such as individual businesses or the stock exchange. Sufficient funding was also needed by CPO exporters and this increases every year following the demand. Actually, there were many palm oil downstream industries in Indonesia which have great prospects, including, cooking oil and oleo chemicals, i.e. fatty acid, fatty alcohol, stearin, glycerin, and metallic soap. Empirical evidence showed that financing only played a limited role in supporting exports in Indonesia. According to the Bank of Indonesia, national exports always grew every year, especially for non-oil and gas exports, although export credits tended to be sluggish. This means that the role of the banking system was not optimum in supporting exports. Besides that, there were strong indications that exporters utilized other sources of funds such as foreign loans, supplier‘s payment postponement, buyer‘s down payment, stock exchange, and venture capital. 5 The CPO export development is strategic, because it could create employment, increase economic growth, and improve people‘s welfare. By that, factors which are affecting the performance of CPO exports should be identified in order to determine appropriate efforts to encourage CPO exports in the future. Various related government policies and issues have also been analyzed. LITERATURE REVIEW Greenaway has observed related empirical issues and policies on regional and inter- industry trade arrangement in the period of 1974-1985. Research objects included the Central American Market (CACM), Latin American Free Trade Area (LAFTA), and European Community (EU). Based on econometric analysis it was found that the dominant factors in regional and inter-industry trade included strategy interventions, economic scale, and protection of neo-infant industries (Greenaway et al., 1989). Scott (King, 1990) examined the efforts to create comparative advantages in international trade. Although many of Ricardo‘s arguments (1817) are still relevant, nevertheless, a dynamic coparative advantage theory is needed. For instance, the Japanese Model has created an appropriate comparative advantage strategy. Poot et al. (1991) has analyzed the trade and industrialization in Indonesia in the decades of 1970s and 1980s by focusing on manufactures and small scale industry exports. The research was conducted to understand the relationship between industrialization and exports and economic growth and development. Several important issues included structural changes, regional distribution, trade orientation, relationships among manufacturing industries, differences between large and small industries, investments and utilization of medium and large industries‘ capacity, intensity of utilization of factors of production, and implications on employment creation and manufacturing development. Lanjouw (1995) has reviewed international trade institutions including the General Agreement on Tariffs and Trade (GATT), World Trade Organization (WTO), United Nations Conference on Trade and Development (UNCTAD), and the Organization for Economic Co- operation and Development (OECD). Subjects reviewed included the role of those organizations, international commodity trade, and regional economic integration. Lanjouw‘s idea was basically in line with Destler (2005) although he focused on trade policy of the United States of America (USA). Several researchers have examined the impact of various variables on CPO production, price, and exports. Setyowaty (1994) has analyzed factors influencing the demand of Indonesia‘s CPO exports to various countries by using multiple regression. Based on quality, the Indonesia‘s CPO was found to be inferior when exported to developed countries, especially USA and Japan. Most of previous researchers on CPO export have not included financing and negative campaigns in their models. Purba (1999) only used domestic and export prices of CPO, rate of production, and exchange rate. Hasan et al. (2001) has analyzed the impact of tax imposition and export price on the performance of Indonesia‘s CPO exports. The impact of tax imposition was also studied by Ernawati (2007) by focusing on CPO exports to India. Meanwhile, Basiron (2002) has identified the challenges faced by the world CPO market, including self sufficient policy in developing countries, subsidies in developed countries, establishment of trade standards and quality, non-tariff barriers, and exchange rate effects. 6 The other researchers such as Talib and Darawi (2002) have examined Malaysia‘s CPO market which was influenced by planted area, domestic consumption, exports, and imports, besides the CPO stock and price, production technology, and soybean oil price. Amiruddin (2003) has made a comparison between Malaysia and Indonesia in the context of CPO exports and prices by using an export tax indicator. In addition , Afifuddin (2004) has found that the CPO export price, exchange rate, and soybean oil price all have significant impacts on CPO exports. However, he found that the impact on export prices was negative. Purba (1999) used an econometric model in simulating the impact of internal and external policies on CPO performance. The world and domestic prices of CPO were having positive impacts on the productivity of small scale plantation, while medium and large scale plantations were more responsive only to the world CPO price. Besides, the increase of production has a positive impact on the increase of CPO exports. Indonesia‘s CPO exports were influenced by world CPO price and exchange rate of the rupiah and the dollar. Drajat (2001) has evaluated the performance of the plantation sector in 1994-1998 and its prospects in a free trade era in 2003-2008 by using ordinary least squares (OLS) and two stages least squares (TSLS). The reduction of value added tax could increase the performance of plantations, while the free trade area has had a negative impact. The depreciation of the rupiah against the dollars has had a positive impact and this determined the performance of plantations. However, the increase of labor wages has had a negative impact. The other finding was that the increase of fertilizer price has had a negative but limited impact on the performance of plantation exports. Hasan et al. (2001) has analyzed the impacts of an export tax on competitive ability of Indonesia‘s CPO industry by using vector autoregressive. It was found that CPO exports have drastically decreased by the tax imposition, because of lowering the competitive ability. More than 83 percent of forecasting errors were explained by export shock itself, while only 8.6 percent and 8.4 percent were described by the export tax and export price, respectively. Basiron (2002) has studied the prospects of global supply and demand of CPO industries in Malaysia and Indonesia. CPO has played a positive role in the supply and demand of world vegetable and fat oils. The positive role was supported by technological and economic advantages. There were various challenges in the world CPO markets including a self-sufficientcy policy in developing countries, subsidies in developed countries, establishment of trade quality standards, non-tariff barriers, and exchange rate effects. Tambunan (Santosa, 2002) has analyzed the performance of Indonesia‘s trade in the period of the crisis. The export commodities which have been analyzed included shoes, textiles, electronics, wood products, and automotive components. The supply side should be improved in order to increase the competitive ability of Indonesia including production capacity, technology, human resources, entrepreneurship, stock and quality of raw materials, government policies, distribution system, promotion, infrastructures, institutions, financing, supporting industries, and services. Without significant improvements, it is difficult for Indonesia in facing competition in a free trade area. Kamaludin (Santosa et al., 2002) has studied instability in the foreign trade of Indonesia in the period of 1980-1997. An open economy policy is highly dependent on economic and trade relationships among countries. Trade instability was defined as trade fluctuations. The Instability index of Indonesia‘s primary goods export value was relatively high, but manufactured products have a low instability index. Similar results were also found in the case of export volume. In the context of main destination countries, the highest instability 7 index was found in export value to Canada followed by Japan, USA, and Hongkong. Meanwhile, the highest instability index for export volume was found in Canada. Kusumastuti (Santosa et al., 2002) has observed the interdependency of Indonesia‘s economy on ASEAN‘s exports and imports. A simultaneous equation was used to analyze the data in the period of 1969-1996. It was found that no significant relationship existed between exports to ASEAN countries and the increase of Indonesia‘s national income. Exports to ASEAN countries did not provide spread and a spill-over effect to other sectors of Indonesia‘s economy. Indonesia‘s exports were influenced by price fluctuations and some export commodities were agricultural products which only have a low elasticity if income. The feedback effects were found only in export to Singapore. Santosa (Santosa et al., 2002) has analyzed the performance of Indonesia‘s non-oil and gas export to the Netherlands, England, and Germany in 1983-1995. A gravitation model was used as a tool of analysis. The Indonesia‘s export value to those three countries was influenced simultaneously by Indonesia‘s national income, per capita income of the three countries, commodity price, and exchange rates. Sumiyarti (Santosa et al., 2002) has studied the relationship between exports and economic growth. The analysis was undertaken based on the expansion of the Cobb-Douglas production function and supply and demand of exports. The economic growth was only influenced by capital stock. Japan‘s demand of Indonesia‘s products was determined by national income and a ratio between export and domestic prices. Similar phenomenon was also found in the case of exports to the USA. Talib and Darawi (2002) have examined the CPO market in Malaysia by using an economic approach. Variables used in the model included plantation area, domestic consumption, exports, and imports, while tools of analyses were OLS and 2SLS. The research found that Malaysia‘s economic activities, exchange rate, and world population were important factors in influencing the performance of the CPO industry. In addition to that, there were also other factors including the CPO stock and price, production technology progress, and soybean oil price. Tan (Santosa et al., 2002) has analyzed factors affecting exports of manufactured products in the period of 1983-1997. A simultaneous model of estimation was derived from supply and demand of manufactured export equations. The performance of Indonesia‘s manufactured exports was influenced positively and significantly by export price, production capacity, exchange rate, and deregulation policy. On the contrary, domestic price had no impact on manufacture export. Amiruddin (2003) compared exports and prices of CPO products between Malaysia and Indonesia. The two countries are the biggest CPO exporters in the world. Total CPO production of Malaysia and Indonesia, including CPO and processed palm oil (PPO), have reached 83.5 percent with a market share of 89.6 percent of total CPO in the world market. There were differences in the payment of export taxes between the two countries. Malaysia has imposed a higher export tax on CPO compared to Indonesia, but did not impose an export tax on PPO. In the meantime, Indonesia has imposed a relatively low rate of export tax on PPO. Barlow et al. (2003) has observed CPO industry prospects in Indonesia in the 2000s as a result of large scale expansion undertaken by community and private plantations in 1990s. The main obstacles included limited capital, inefficient use of labor and other resources, low technology, land expansion, and security. These problems could be solved by government 8 support in credit channeling, especially for community plantations. Besides, the CPO industry has to expand its market share. Afiduddin (2004) has studied the impact of CPO market on palm oil plantation in North Sumatra by using a regression and structural equation model (SEM). There was no impact of domestic CPO demand on palm oil plantation, because most producers were export-oriented. The CPO export quotas and exchange rate have positive and significant impacts on palm oil plantation. However, the domestic production and export quota of cooking oil have positive and significant impact on domestic CPO demand. In addition to that, CPO export price, exchange rate, and world soybean oil price have significant impacts on CPO export. Zen et al. (2006) has analyzed CPO contribution in improving the social and economic conditions in Indonesia. The government has used CPO as a social and economic development tool in rural areas through community plantations. More than 900.000 hectares of palm oil plantations have been managed and provide income for more than 500.000 farmers. However, the land conversion problems still existed. Kusuma (2006) has observed the impact of CPO on regional development in North Sumatra. The research was focused on domestic demand, export, domestic price, and CPO export price. The export market and price and domestic price have a significant impact on either plantation areas or CPO production. However, domestic price only has a significant impact on CPO production. Market structure of CPO in North Sumatra was oligopsony. The market was dominated by the integrated wholesaler groups. In the same province, Ginting (2006) has analyzed the impact of CPO‘s downstream industry on regional development. The raw materials have a positive and significant impact on the production capacity of CPO downstream industry. Meanwhile, investments and labor costs have no impact. Nevertheless, the investments have significant impact on regional development. On the contrary, the CPO downstream industry has no impact on regional development. Erningpraja and Kurniawan (2007) have examined factors affecting the respective price of palm oil. The respective price of CPO in 2007 was approximately $ 489.35 per ton CIF Europe, an increase of $ 11.02 per ton CIF Europe in 2006. The respective price of CPO was calculated based on a ratio of CPO and vegetable oils. CPO price tended to increase in 2008- 2010, i.e. $ 522.97 per ton, $ 562.46 per ton, and $ 606.76 per ton CIF Europe, respectively. PT. Capricorn Indonesia Consultant, Inc. (2007) has studied the investment prospects of palm oil industry in Indonesia. The role of CPO has become stronger in the world market and is able to replace the role of other vegetable oils. The price of CPO is constantly increasing in the world market. The increase was not only influenced by the increased demand for the cooking oil industry and the like, but also by the increased demand of other industries, such as biofuels. CPO has become one of the most important and prospective commodities for Indonesia in the future. Ernawati (2007) has examined the impact of an export tax on Indonesia‘s CPO exports to India by using an error correction model (ECM). The CPO export volume to India was influenced significantly by the changed ratio of soybean oil price and world CPO price, production index, and previous CPO export demand. The respective elasticity for each coefficient was 2.74, 2.69, and 0.69. Nevertheless, ECM coefficient was near zero indicating that those variables were not influencing the demand for exports in the long run. The direct impact of export tax reduction was the increase of CPO export volume to India from 202,960 tons to 237,570 tons. 9 If compared to previous research, this research is more comprehensive. The analysis is started by describing plantation development in Indonesia. Analysis is then continued by the progress of production and consumption of Indonsia‘s CPO in world and domestic markets. The performance and role of CPO exports in the Indonesia‘s economy are the next subjects. The performance of Indonesia‘s CPO export is represented by CPO export volume. Factors influencing the performance of Indonesia‘s CPO exports are derived from Setyowati (1994), Purba (1999), Talib and Darawi (2002), Tan (Santosa et al., 2002), and Afifuddin (2004). The government policy is also included in the time-series model and represented by an export tax. The impact of the export tax on CPO export performance has already been studied by Hasan et al. (2001), Amiruddin (2003), and Ernawati (2007). The estimation model is finally completed by adding export financing and the negative campaign about environmental issues in the CPO‘s trade in the international market. INTERNATIONAL TRADE THEORY International or trade economics could be categorized as classical trade theory, neoclassical, and alternative theory (Appleyard and Field, Jr., 1995). The classical trade theory was built on the mercantilism era and was developed into comparative advantage theory by David Ricardo. Topics discussed included Ricardian comparative advantage, export concentration, trade and income, resource limitation and specialization, production- possibilities frontiers, wages and exchange rates, commodity variation, transportation cost, labor productivity, and market penetration. The basic idea of classical trade theory was developed further by F. Y. Edgeworth, Eli Heckscher, and Bertil Ohlin. Edgeworth box diagram was used to analyze consumer behaviors and production equilibrium. Meanwhile, Heckscher-Ohlin Theorem discussed the natural resources abundant as a factor of production. The main ideas in neoclassical trade theory also included consumption and production benefits, minimum requirements and assumptions, and relationship between distribution and trade performance. Various models were developed to adopt the dynamics of inter-industry trade among countries. An alternative theoy is developed by Michael V. Posner (1961) with the Imitation Lag Hypothesis and Raymon Vernon (1966) with the Product Cycle Theory. In 1960s, there were the Linder Theory developed by Staffen Burenstam Lindar (1961) which analyzes product age and industry characteristics, and the Kemp Model from Murray C. Kemp (1964) which is based on the economies of scale. With the increase of economic activities in 1970s, Paul Krugman (1979) developed a Krugman Model which is characterized by the economies of scale and monopolistic competition. Meanwhile, to explain inter-industry trade there is the Falvey Model developed by Rodney Falvey (1981) which is a development of the Heckscher- Ohlin Theorem. TABLE 1. THE IMPACTS OF INTERNATIONAL POLICY ALTERNATIVES Effects Tariff Export Subsidy Import Quota Voluntary Export Restraint Producer surplus Increses Increases Increases Increases Consumer surplus Falls Falls Falls Falls Government revenue Increases Falls (government spending rises) No change (rents to license holders) No change (rents to foreigners) Overall national welfare Ambiguous (fall for small country) Falls Ambiguous (falls for small country) Falls Source: Krugman dan Obsfeld, 2003. 10 The efforts undertaken to increase the performance of exports are complex include import tariffs, relative demand supply effect on tariffs, impact of export subsidies, economic growth, and income distribution (Krugman and Obstfeld, 2003). According to Appleyard and Field, Jr. (1995), potential factors which have impact on exports in the long run are income elasticity of demand, unequal market forces, technology progress, and the role of multinational companies (transfer pricing). The government produces relevant policies which influence producer and consumer surplus, government revenue, and people‘s welfare. The sources of trade problems among countries include price instability and demand and supply of export commodities (Appleyard and Field, Jr., 1995). PRICE FORMULATION An investor should understand CPO price behavior, competitors, and interconnection between the world CPO price and the TBS price. The CPO price has a 5-6 years cycle, minor upward trend, and a seasonal cycle. Although it fluctuates, the middle value of CPO price is approximately $ 430 per ton cif Rotterdam. At international price, the selling price of CPO at plantation is approximately 2,800 rupiahs per kg and TBS price is approximately 530 rupiahs per kg. One cycle consists of one main peak (18-25 months) and several minor peaks. The frequency of CPO price lower than $ 403 per ton is approximately 65 percent. The seasonal price has one peak in December-January and two niches, i.e. a minor niche in April-May and a major niche in July-August (Buana and Dja‘far, 2003). In the world market, CPO is competing with other vegetable oils, especially soybean and rapeseed oils. The fluctuation in production or demand of one vegetable oil will influence the price of others. Vegetable oils are used for food and non-food products. The demand for food products is determined by the number of population, per capita consumption, and purchasing power of consumers. The level of consumption will be higher in developed countries. Buana (2001) has found that the maximum per capita consumption of vegetable and animal oils is different from one ethnic region to another. The health issues also encourage the reduction of animal fats consumption. Meanwhile, the demand of vegetable oils for non-food products is determined by environmental issues, energy consumption, and technology. There are three main important CPO markets in the world, i.e. Rotterdam, Chicago, and Kuala Lumpur. The CPO price (FOB) in Kuala Lumpur, Belawan, and Dumai are equal to the price in Rotterdam minus about $ 55 per ton transportation cost. The price of CPO from stock tanks in the port is CPO price (FOB) minus export tax of approximately $ 4.8 per ton, export document costs, and bank provision of approximately $ 10 per ton. The price of CPO at the palm oil plantation is calculated from the CPO price at the stock tanks minus transportation cost of approximately 0.7 rupiahs per kg per km which is equal to 16 rupiahs per kg TBS, pumping costs, and other marketing costs of approximately 25 rupiahs per kg CPO or 5 rupiahs per kg TBS. FIGURE 1. CPO PRICE FORMULATION (Source: Buana dan Dja‘far, 2003) Planting materials Climate Planting Area Health Issues Economic Growth Population Growth 11 The domestic consumption of CPO in Indonesia is highly influenced by the consumption of cooking oil. The government is very keen to control cooking oil trading in order to maintain sufficient supply and an achievable price. The contribution of CPO in cooking oil production is as high as 80 percent, so the domestic supply of cooking oil is highly depend on the supply of CPO. The production volume of CPO in 2002 was 9 million tons, far above domestic consumption, that is only 3.5 million tons. The government control is undertaken through export tax and quota. At an exchange rate of 8,500 rupiahs per 1 dollar, the price of CPO is $ 590 per ton cif Rotterdam and the price of cooking oil is 5,000 rupiahs per kg. When the exchange rate, for instance, reaches 15,000 rupiahs per 1 dollar as in 1998, the price of CPOl becomes $ 630 per ton cif Rotterdam, and an export rush will take place. The price of cooking oil industries is expected to reach 8,500-9,000 rupiahs per kg. In order to reduce the price to 4,000 rupiahs per kg, the government should impose an export tax of 60 percent of FOB value, so that the CPO price at the port tanks will be $ 230 per ton. The lower domestic price will encourage the producers to export the CPO (Buana dan Dja‘far, 2003: 29). SUSTAINABLE PALM OIL INDUSTRY The sustainable palm oil industry is a solution for consumers who are demanding a green production supply chain of CPO (environmental issue and natural biodiversity). The initiative for a sustainable palm oil is referred to the guideline produced by the Sustainable Agriculture Network (SAN), Forest Stewardship Council (FSC), International Standard Organization (ISO) 14001 EMS, MPOA Environmental Charter, Migros Criteria, Unilever‘s Sustainable Palm Oil Guidelines, and others (Dja‘far et al., 2005). Recently, the principles and criteria of suatainable palm oil industry have been adopted from the Roundtable on Sustainable Palm Oil (RSPO). The RSPO is developed under an informal cooperation which is initiated by the World Wildlife Fund (WWF), Golden Hope, Migros, MPOA, Sainsbury, and Unilever. The initial meeting was conducted in London on 20 September 2002. The first formal meeting was conducted in Kuala Lumpur on 21-22 August 2003 and produced a sustainable CPO concept. CPO Production Seed Production Climate Previous Price Meat Price CPO Price Demand Supply Oleofood Oleochemical Health Issues Petroleum Reserves Environment Issues Technology 12 The RSPO was then declared on 8 April 2004 and registered under Article 60 of the Swiss Civil Code. The RSPO is a non-profit association with members consisting of organizations in and surrounding the supply chain of CPO. The second meeting of RSPO was conducted on 5-6 October 2004 in Jakarta. The Principle and Criteria for Sustainable Palm Oil was produced in this meeting. The third RSPO meeting was conducted in Singapore on 21-22 November 2005 and attended by more than 300 participants from 28 countries. The third meeting was also attended by the representative of certification agencies, press, researchers, and environmental and social activists. The topics discussed in the meeting were focused on the principles and criteria as references in producing CPO ant its derivatives. The RSPO guideline consists of 8 principles and 39 criteria which are to be implemented within two years of the probation period since 2006 and are subject to review. METHODOLOGY Data The main data used include export volume and value of Indonesia‘s CPO, CPO export volume and value by destination countries, CPO export financing, CPO export and domestic prices, CPO production, CPO domestic consumption, other vegetable oils prices and consumption in the world market, world crude oil price, exchange rate of rupiah and dollar, per capita GDP of the main destination countries of Indonesia‘s CPO exports, related government regulations, and negative campaigns. These data were collected from the publications of both international and national institutions including the National Statistic Agency (BPS), Indonesia Eximbank, Ministry of Industry, Ministry of Trade, and Ministry of Agriculture. Analysis Quantitative techniques were used in analyzing the data, i.e. descriptive statistics, trends, and econometrics (test of statistics between two means and multiple regressions). The descriptive statistics were used to describe the fluctuations of CPO exports and factors affecting it. A moving average trend was used to understand data movement and tendencies and to make a forecast. The test of statistics between two means was implemented to compare the productivity of CPO production between Indonesia and Malaysia. This tool was also utilized to compare the performance of Indonesia‘s CPO exports between periods. The CPO producers in Malaysia are assumed to have higher productivity than CPO producers in Indonesia. Multiple regressions were used to test the impact of various variables on the performance of Indonesia‘s CPO exports. For this purpose, an econometric model was built with reference to Gujarati (1995, 2006), Pindyck dan Rubinfeld (1998), Thomas (1993, 1997), dan Verbeek (2004). t s t s t s t s t s t s t s t s t s t s t s t s t s t s t t x x x x x x x x x x x x x x y c o o o o o o o o o o o o o o o + + + + + + + + + + + + + + + = ÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ 14 14 13 13 12 12 11 11 10 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 (1) where = t y Indonesia‘s CPO export volume (thousand tons), = t x 1 Indonesia‘s CPO price in the world market (dollar per ton), = t x 2 domestic CPO price (dollar per ton), = t x 3 domestic CPO consumption (thousand tons), = t x 4 Indonesia‘s CPO production volume 13 (thousands ton), = t x 5 exchange rate (rupiahs per 1 dollar), = t x 6 per capita gross domestic product (GDP) of India (dollar), = t x 7 per capita GDP of the Netherlands (dollar), = t x 8 per capita GDP of Malaysia (dollar), = t x 9 per capita GDP of China (dollar), = t x 10 CPO financing in Indonesia (billion rupiahs), = t x 11 deregulation policy (dummy variable), = t x 12 world crude oil price (dollar per barrel), = t x 13 other vegetable oils price in the world market (dollar per ton), = t x 14 negative campaign (dummy variable), = s 0, 1, 2, 3, …, time lag, and = t c error term. INDONESIA’S CPO PRODUCTION AND CONSUMPTION Palm Oil Plantation According to the Bogor Research Center for Land and Agroclimate, total potential land for palm oil plantations in Indonesia is approximately 31.8 million hectares in 2006. The land potential is mainly located in Sumatra island (38.65 percent), Kalimantan island (38.42 percent), and Papua island (20.09 percent). In addition to that, there is also potential land for palm oil plantation in Sulawesi island (1.85 percent) and Java island (0.99 percent). In 2006, the largest plantation was found in Riau Province, that is 1,383,477 hectares, followed by North Sumatra Province (964,257 hectares). The other provinces with significant land area of palm oil plantation are South Sumatra (532,365 hectares), West Kalimantan (466,901 hectares), and Jambi (466,709 hectares). The growth of palm oil plantation area is very fast in the period of 2000-2005, that is 20.5 percent per annum. This growth rate is faster than the previous period of 1990-1997. In 2000, the total area of palm oil plantation was 4.2 million hectares. The area was then increased to 6.07 mullion hectares in 2006. If compared to the other CPO producer countries, Indonesia has had comparative advantages, such as abundant area and fertile lands and suitable geographical conditions. Although, there are other factors which affect the growth and productivity of palm oil plants including technical aspects of agronomy (Risza, 1994). TABLE 2. COMPARATIVE ADVANTAGES OF CPO PRODUCERS No. Country Land Area (million ha) Score Production Rank in 2005 State Forest Geography (Climate) Land Fertility Total Score 1. Brazil 845,65 477,70 80 99 378.34 11 2. Indonesia 181,16 88,50 100 100 88.50 2 3. Colombia 103,87 60,73 92 90 50.28 5 4. India 297,32 67,70 55 80 29.79 - 5. Papua New Guinea 45,29 29,44 90 95 25.17 6 6. Malaysia 33,36 20,89 95 100 19.85 1 7. Ghana 25,77 21,78 100 88 19.17 13 8. Cameroon 46,54 21,25 90 80 15.30 11 9. China 929,16 197,29 15 50 14.80 - 10. Thailand 51,09 14,52 75 100 10.89 4 11. Ecuador 27,68 10,85 99 80 8.59 8 12. Nigeria 91,08 11,09 85 70 6.60 3 13. Ivory Coast 31,80 7,15 100 90 6.44 7 14. Kenya 56,97 3,52 100 45 1.58 - Source: FAO Global Forest Resources Assessment 2005 (Pahan, 2007). 14 According to Pahan (2007), the most appropriate strategy used often by CPO producers to increase their market share is low cost leadership. Palm oil plants are perennial crops which have vegetated growth periods at the beginning, so the investments are categorized as long term investments. In approximately 30-36 months, the expenses are only for cultivation activites. The break even point will be reached on average within 9 years (Pahan, 2007). Based on that condition, the palm oil business requires an economic scale of a minimum of 6,000 hectares together with processing capacity of a factory, number of workers, and transportation costs. The product of palm oil at the plantation level is TBS (the stem of the fresh palm oil bunch). The TBS is processed to produce intermediate product, i.e. crude palm oil (CPO) and palm kernel oil (PKO). Both CPO and PKO can be further processed to produce various products. The TBS contains about 2 percent of free fatty acid (FFA) when harvested and this continues to increase. A high level of FFA will reduce the CPO quality and price. The maximum tolerance for CPO standard export is 5 percent. For this reason, the TBS should not be stored more than 24 hours in the field. Productivity of TBS will increase sharply once the age of palm oil plants has reached 3- 7 years which is known as the young plant period. Maximum production will be reached at 15 years which is called the prime age period. Then, the production will decline as the plants become old and replanting is required. The capacity of a processing factory is determined by the productivity of palm oil plants. In the peak of production, total TBS produced will reach 10-13 percent of the whole year‘s production. The CPO and PKO extracts are unique every day and influenced by the quality of TBS, the performance of machines, and synchronization among processing units. According to Pahan (2007), there are 3 types of palm oil factories. They are (1) Mini mill with total processing capacity of 5 tons of TBS per hour; (2) Regular mill with total processing capacity of 30, 45, 60, and 90 tons TBS per hour; and (3) Interim line mill with total processing capacity of 30 tons of TBS per hour. Various final products of CPO include cooking oil, margarine, dry oil for snacks and fast foods, shortening, non-dairy creamers, and ice cream. The nutrient contain of CPO is very good for human consumption including calories, vitamins, digestion, essential and free fatty acids, and low cholesterol. CPO contains low cholesterol, i.e. 3 mg per kg. This amount of cholesterol is similar to the other vegetable oils but is much lower than in animal oils. For example, there is 220 mg of cholesterol per kg butter produced from animal oil. According to the Oil World, the use of CPO for food products competes with soybean oil (Pahan, 2007). Apart from that, the use of CPO for non-food products is competing with fatty acid produced from cow fat (tallow). However, total consumption of CPO and PKO in the world market are increasing rapidly every year. In 2003, total consumption of CPO and PKO was 19.13 percent of total world oil consumption. In 2005, total consumption of CPO and PKO increased to 23.53 percent of total world oil consumption. Animal oils production tended to decrease. In 2008, Indonesia becamethe biggest CPO producer in the world replacing Malaysia. This fact had been predicted by Pahan (2007). Total production of Indonesia‘s CPO in 2005 was 12.6 million tons or equal to 38.77 percent of total production of CPO in the world (32.5 million tons) and increasing rapidly. Indonesia has a tropical climate which is appropriate for palm oil plants. Indonesia‘s climate is relatively similar to several palm oil producers include Malaysia, Brazil, India, 15 Cameroon, Zaire, Ivory Coast, Kenya, and Ghana. Meanwhile, in the context of the plantation area, the potential land for palm oil plantation in Indonesia is larger than in Malaysia, but competes with Brazil, Colombia, Papua New Guinea, and Cameroon. The availability of labor is an important requirement in optimizing CPO production. Palm oil plantations are labor intensive activities which require a lot of labor. Besides, labor skills and wages are the other factors which determinethe comparative advantages of palm oil producers. If compared to the other countries, Indonesia, India, Cameroon, Zaire, and Ghana are classified as the countries with superior labors for palm oil plantations (FAO Country Tables 1992). TABLE 3. COMPARISSON OF COMPARATIVE ADVANTAGE ON LABORS BETWEEN PALM OIL PRODUCERS No. Country Labors Ranks Quantity Skill Price 1. India Abundant High Low 1 2. Indonesia Abundant Medium Low 2 3. Cameroon Abundant Low Low 3 4. Zaire Abundant Low Low 3 5. Ghana Abundant Low Low 3 6. Thailand Abundant High High 4 7. Brazil Abundant Medium High 5 8. Malaysia Sufficient High High 6 9. Colombia Sufficient Medium High 7 10. Papua New Guinea Limited Low Low 8 Source: FAO Country Tables 1992 (Pahan, 2007). Government support is essential to create a conducive climate for upstream and downstream palm oil industries. For instance, since 1980s, the Government of Indonesia has provided opportunities for cooking oil factories to have their own palm oil plantations in order to secure raw material supplies. In addition to that, the Ministry of Agriculture has established palm oil as one of the strategic agriculture commodities. The government efforts on palm oil industries are facilitated by the provision of soft loans from the Bank of Indonesia to both national private plantations and community plantations. Besides, the banks also provide working capital and investment credits for national palm oil industries. The plantation area and CPO and PKO production have increased vastly and also the domestic and foreign trading of CPO and PKO. The other factor which influences CPO production is environmental movements. Actions and campaigns are mostly related to the land clearing for the new palm oil plantation and expansion of the area. These activities very often impede the activities of palm oil industries. To overcome such kinds of problems, palm oil producers have undertake positive action by establishing principles and criteria as guidelines for palm oil industries which consider sustainable development. The efforts of palm oil producers are recognized as the Roundtable Sustainable Palm Oil (RSPO). With different kinds of effort, world CPO supply is increase rapidly following the increase in demand. In 1987-2007, world CPO production had increased from 7,743,000 tons to 38,163,000 tons (World Oil) or an increase of 392.87 percent. Malaysia‘s CPO production was increased from 4,533,000 tons to 15,740,000 tons, while Indonesia‘s CPO production increased from 1,380,000 tons in 1987 to 16,800,000 tons in 2007. This fact means that Indonesia has exceeded Malaysia in producing CPO. Total production of Indonesia‘s CPO is 16 equal to 44.02 percent of total world CPO production in 2007, while Malaysia contributes 41.24 percent. The CPO production in Indonesia grew more than 10 times or 1,117.39 percent in the period of 1987-2007. The increase of CPO production is supported by the vast increase of plantation area and productivity. The plantation area has increased from 425,000 hectares in 1987 to 4,540,000 hectares in 2007. Meanwhile, the productivity has also increased from 3.25 tons per hectare to 3.70 tons per hectare in the same period. However, the productivity of palm oil plants in Indonesia is consistently lower than in other countries. Productivity of palm oil plants in Malaysia is 4.15 tons per hectare and in Colombia is 3.90 tons per hectare. TABLE 4. PRODUCTION, PLANTATION AREA, AND PRODUCTIVITY OF WORLD PALM OIL IN 1987 AND 2007 No. Country Year 1987 Year 2007 Production (000 ton) Land (000 ha) Productivity (ton/ha) Production (000 ton) Land (000 ha) Productivity (ton/ha) 1. Malaysia 4,533 1,271 3.57 15,740 3,790 4.15 2. Indonesia 1,380 425 3.25 16,800 4,540 3.70 3. Nigeria 421 210 2.00 835 390 2.14 4. Ivory Coast 210 106 1.98 320 168 1.90 5. Colombia 148 49 3.02 780 200 3.90 6. Thailand 114 64 1.78 1,020 410 2.49 7. Others 937 455 2.06 2,668 1,052 2.54 8. World 7,743 2,580 3.00 38,163 10,550 3.62 Source: World Oil 2007. CPO Production Total production of Indonesia‘s CPO is 13.39 million ton in 2006 with a total plantation area of 6.07 million hectares. The CPO/TBS ratio is relatively low, i.e. 22.21 percent. As a comparison, total plantation area in Malaysia in 2006 is only 3 million hectares, but is able to produce CPO as much as 15 milion tons. To increase the productivity, Indonesia‘s CPO producers have significantly increased the CPO/TBS ratio and also improved post harvets management. The role of large scale private and community plantations in producing CPO have increased in Indonesia. On the other hand, the contribution of state-owned plantations was stagnant. Total CPO production of private and community plantations have increased five times in 2006 if compared to 1995. Total CPO production of private plantations alone have increased from 1.9 million tons in 1995 to 6.3 million tons in 2006. Meanwhile, total production of community plantations have also increased from 1 million tons to 5.1 million tons in the same period. Total CPO production of state-owned plantations were only slightly increased from 1.6 million tons in 1995 to 1.9 million tons in 2006. TABLE 5. INDONESIA’S CPO PRODUCTION IN 1990-2006 Year Plantation (ha) TBS Production (ton) CPO Production (ton) CPO/TBS Ratio (%) 1990 1,126,677 11,488,629 2,412,612 21.00 1991 1,310,996 12,530,568 2,657,600 21.21 1992 1,467,470 14,646,861 3,266,250 22.30 1993 1,613,187 16,937,866 3,421,449 20.20 1994 1,804,149 18,995,555 4,008,062 21.10 1995 2,024,986 21,031,315 4,479,670 21.30 1996 2,249,514 23,106,877 4,898,658 21.20 1997 2,516,079 25,743,766 5,380,447 20.90 17 1998 2,788,783 27,116,125 5,640,154 20.80 1999 3,172,163 29,292,190 6,004,899 20.50 2000 3,769,609 37,527,233 7,580,501 20.20 2001 3,974,337 39,646,224 7,968,891 20.10 2002 4,116,646 40,183,207 9,024,000 22.46 2003 4,819,867 48,921,650 10,958,450 22.40 2004 5,675,430 58,519,359 12,991,298 22.20 2005 6,125,430 56,782,736 13,173,595 22.20 2006 6,074,926 61,739,473 13,390,807 22.21 Source: Ministry of Agriculture Republic Indonesia and GAPKI. CPO Export and Import Indonesia is the main competitor for Malaysia in the world CPO market. The growth rate of Indonesia‘s CPO export is on average 28.7 percent per annum in 1996-2006. Total export volume of Indonesia‘s CPO has increased from 1.7 million tons in 1996 to 11.1 million tons in 2006. In the same period, the export value has also increased substantially from $ 825.4 million to $ 4.3 billion. TABLE 6. INDONESIA’S CPO AND PKO EXPORT VOLUME AND VALUE IN 1996-2006 Year CPO PKO Volume (ton) Value ($ 000) Volume (ton) Value ($ 000) 1996 1,671,957 825,415 341,318 235,168 1997 2,967,589 1,446,100 502,979 294,255 1998 1,479,278 745,277 347,009 195,447 1999 3,298,986 1,114,242 597,842 347,975 2000 4,110,044 1,087,291 578,824 239,120 2001 4,903,218 1,080,906 581,926 146,259 2002 6,333,708 2,092,404 738,416 256,234 2003 6,386,410 2,454,626 659,894 264,678 2004 8,661,647 3,441,776 904,327 502,681 2005 10,376,190 3,756,284 1,043,196 587,746 2006 11,100,120 4,255,797 1,152,813 562,283 Source: National Statistic Agency (BPS). There are several main importers of Indonesia‘s CPO include the Netherlands, Malaysia, India, China, Spain, Germany, USA, Italia, Singapore, and Turkey. In addition to that, there are other potential countries for export expansion such as Egypt, Kenya, Greece, Pakistan, Bangladesh, Brazil, England, Myanmar, Saudi Arabia, Canada, and Australia. In the future, Indonesia should expand its CPO export markets to reduce demand dependency on certain countries. The most important importer is India with the share of 42 percent of total Indonesia‘s CPO exports in 2005. The EU is the second largest importer with the proportion of 20.6 percent. However, the highest growth of imports is found in China, Ceylon, and Tanzania. In 2005, CPO export volume to China had reached 511,000 tons or increased by 41.55 percent from the previous export volume. India and China are very important importers because both countries are having large populations. TABLE 7. MAIN DESTINATION OF INDONESIA’S CPO EXPORT IN 2003-2005 No. Country Year (000 ton) 2003 2004 2005 18 1. India 1,533 1,746 1,905 2. European Union 617 791 931 3. China 298 361 511 4. Malaysia 321 493 344 5. Ceylon - 13 202 6. Tanzania - 45 128 7. Others 313 528 502 Source: Oil World Monthly 2005. Indonesia also imports some CPO and PKO to meet domestic demand. Import volume and value of the two products tended to decrease in the period of 1996-2006. In 1990, Indonesia imported 26,183 tons of CPO with an import value of $ 7.7 million. Import volume then increased to 49,785 tons with a value of $ 48.1 million in 1995. However, in 2005, import volume of CPO decreased to only 3,775 tons with an import value of $ 915,000. In 2006, import volume of CPO increased again to 10,975 tons with an import value of $ 1.7 million. FIGURE 2: EXPORTS AND IMPORTS OF INDONESIA’S CPO IN 1995-2006 (Source: PT. Capricorn Indonesia Consultant Inc.) The equilibrium of CPO exports and imports is determined by CPO price in the world market. The CPO price has always fluctuated and tend to increase, especially in 2007. The average CPO price in the world market in 1986 was approximately $ 257 per ton and increased significantly to $742 per ton in 2007. Meanwhile, the lowest CPO price in the period of 1986-2007 occurred in 2001. FIGURE 3: CPO PRICE IN WORLD MARKET IN 1986-2007 (CIF Rotterdam) (Source: GAPKI) 19 CPO Domestic Consumption Indonesia is one of the most populated countries in the world. So, Indonesia has potential as a market for CPO products. Most of the domestic CPO has been absorbed by the cooking oil industry. In addition, some quantities of CPO products are used by olechemical and biodiesel industries. In total, there were 70 cooking oil factories in Indonesia in 2006 with a total capacity of 10 million tons. Most of those cooking oil factories are located in North Sumatra (19 factories) and Jakarta (12 factories). There are also cooking oil factories in East Java, West Java, and Lampung. The other important consumers of domestic CPO are margarine/shortening, soap and detergents, and olechemical industries. Domestic consumption of CPO in Indonesia was relatively constant in the period of 1995-2006. Total domestic consumption of CPO in 2006 was 2.3 million tons which is not much different from total consumption in 1995 (3.3 million tons). The highest domestic consumption took place in 1998 (4.2 million tons), while the lowest domestic consumption happened in 2005 (1.5 million tons). TABLE 8. DOMESTIC CONSUMPTION OF INDONESIA’S CPO AND PKO IN 1995-2006 Year Domestic Consumption (ton) CPO PKO 1995 3,264,431 634,903 1996 3,334,254 746,490 1997 2,504,538 729,513 1998 4,178,493 937,239 1999 2,707,561 796,078 2000 3,474,249 1,180,095 2001 3,065,815 1,076,721 2002 2,696,744 956,081 2003 4,058,438 1,446,272 2004 2,173,062 1,562,556 2005 1,496,633 1,571,583 2006 2,290,698 1,909,313 Source: BPS. CPO EXPORT POLICY 20 The impact of the global crisis has affected Indonesia‘s exports including CPO. To anticipate the impact, the government has provided regulations to try to create a conducive climate for palm oil industries. However, the existing regulations are not sufficient yet to support the CPO industry in the long run (Kompas, 4 April 2009). The Minister of Trade has launched various regulations to increase export performance such as Regulation No. 43/M- DAG/PER/10/2007 on the Certificate of Origin for Indonesia‘s Exported Goods. As for the CPO trading, the fundamental policy is fixing of export price. According to the Ministry of Trade Decree No. 20/M-DAG/Per/5/007, the standard export price of Indonesia‘s CPO is approximately 1.2-15.3 percent. The standard export price is dynamic according to the fluctuation of CPO export volume. The government also has established an export tax which was imposed since 3 September 2007. The export tax is 10 percent if CPO export price maximum $ 850 per ton and 15 percent if the price is higher to a maximum $ 1,100 per ton. Afterwards, the export tax will become 20 percent until CPO export price is $ 1,200 per ton. Finally, the export tax is 25 percent if the export price reaches $ 1,300 per ton. The export tax is a creative policy, but it is only effective in the short run. There are many ways that could be undertaken in order to manage Indonesia‘s CPO trading without an export tax. For example, the government could increase or control domestic CPO by imposing a domestic market obligation (DMO) policy. This policy is generally accepted by either producers or consumers. The progressive tax or tariff is an obstacle for CPO exporters, because the tax burden is higher. On the other hand, the government should provide incentives for CPO producers. By comparison, the tax burden for CPO producers in Malaysia is lower than in Indonesia. In practice, many CPO producers often postpone their shipping of CPO abroad if the export tax is relatively high. The high export tax will also encourage CPO smuggling, because producers tend to try to avoid a higher tax burden. Other than exports, the government also establishes regulations on imports As the main CPO producer in the world, Indonesia did not provide special treatment to block CPO imports (barriers to entry). Import tax for CPO is zero percent for several years although there is a 10 percent income tax for all palm oil products. However, only limited amounts of the tax collected are used for the development of the palm oil industry. The CPO exports or imports trend is not greatly influenced by the world and domestic demand. The increase of CPO price is mainly caused by the constanly high demand from cooking oil industries. Apart from that, the utilization of CPO as an alternative source of energy, especially biodiesel, also provides significant impact on CPO demand. The developed countries including USA, Japan, South Korean, and EU begun to expand their investment in palm oil plantation. TABLE 9. DOMESTIC AND INTERNATIONAL PRICE OF INDONESIA’S CPO IN 2001-2007 Year Domestic Price (Rp per kg) International Price ($ per MT) 2001 2,084.90 275.66 2002 2,840.30 388.89 2003 3,299.70 447.61 2004 3,672.30 471.30 2005 3,377.00 422.10 2006 3,171.80 525.00 2007 6,823.00 625.00 Source: PT. CIC (2007). According to economists and analysts, this is a golden period of palm oil, because CPO price in the world market tends to increase. The CPO producers in Indonesia should make use 21 of this momentum to develop the palm oil derivative products and not only CPO. However, the government regulations are crucially important to establish Indonesia as the main palm oil producer in the world as well as its derivative industries (Amri and Yulianto, 2008). The researchers from the Research Center for Palm Oil (PPKS) in Medan, North Sumatra, have emphasized that the government should produce an integrated policy. The export tax should be reallocated to develop palm oil industries. As a comparison, the Government of Malaysia has consistently used CPO export tax of 15 ringgits per ton to support research on palm oil development. At the beginning of 2007, the Government of Indonesia implemented DMO to secure domestic supply and stabilize the CPO price. Two big producers, Sinar Mas and Astra for example, are required to sell 20 percent of their CPO production in the domestic market. Nevertheless, the DMO policy was not effective, because the government was not firm in enforcing the policy. In addition, the CPO producers have to obey the floor price policy for the domestic market. The government should implement a reward and punishment approach in CPO policy enhancement. Besides, policy formulation should be undertaken by involving relevant stakeholders. Previously, the formulation of the CPO export tax by the Ministry of Finance was conducted without the input of GAPKI and other palm oil associations. Furthermore, the National Palm Oil Council has not provided a significant contribution to the development of the palm oil industry in Indonesia. The implementation of the CPO export tax was not effective in controlling the domestic price of CPO, because that policy is often inconsistent. Most of CPO producers have signed forward trading contracts with foreign buyers. As a consequence, the bargaining power of Indonesia‘s CPO producers is weak in the world market. The performance of Indonesia‘s CPO export is extremely influenced by global issues. International consumers often require tight conditions for CPO. For instance, CPO exporters are facing non-_tariff barriers implemented in destination countries. The Government of India requires CPO with a minimum β-caroten of 500 ppm. This requirement is difficult to fulfill by Indonesia‘s exporters, because most of the CPO received in the final consumers contains only around 400 ppm of β-caroten. Low β-caroten is mainly caused by a bad handling of CPO from producers to final consumers. The other requirement is the content of FFA. CPO EXPORT PERFORMANCE CPO Export Volume The Indonesia‘s CPO export performance is described by export volume and value. Since 1999, CPO export volume always increased by different percentages. Before 1999, there were three decreases of CPO export volume, i.e. in 1992, 1995, and 1998. In 2007, CPO export volume had reached 13.1 million tons or about 8.26 percent higher than export volume in 2006 (12.1 million tons). The behavior of CPO export volume is not linear, the exponential smoothing is the most suitable trend method used to forecast the export volume. Although tending to under-estimate, the growth rate of export volume of Indonesia‘s CPO was faster after 1998. The export volume was projected to increase 9 percent to become 14.3 million tons in 2008. FIGURE 4: EXPORT VOLUME OF INDONESIA’S CPO 1990-2007 (Source BPS) Million Tons 22 The best performance of Indonesia‘s CPO export in the period of 1990-2007 was in 1999 where the export volume increased by 123.01 percent. The second best performance is found in 1997 and 1993 where the CPO export volumes increased 77.49 percent and 58.41 percent, respectively. However, it is important to notice that the increase of CPO export volume is slower in the last three years. There are at least two factors which contribute to the lower rate of CPO export volume. First, there is an accumulation of world palm oil stocks, especially in Indonesia and Malaysia. Second, in the middle of 2007, the global economic crisis begun and this lowered the purchasing power in the main importer countries of Indonesia‘s CPO, especially in Europe. However, the fluctuation of CPO export volume is a usual and repetitious phenomenon of previous periods. In the similar span of time, the worst CPO export performance occurred in 1998 when CPO export volume decreased 50.15 percent. The decrease of export volume was also found in 1992 (11.77 percent) and 1995 (22.45 percent). The interesting fact is that in the crisis period of 1997-1998, there was an extreme fluctuation of Indonesia‘s CPO export volume. A significant decrease (50.15 percent) happened in 1997, but in 1998, there was a sharp increase of CPO export volume (123.01 percent). This fact has indicated that the performance of CPO exports is very sensitive to domestic economy conditions. FIGURE 5: PERCENTAGE CHANGE OF INDONESIA’S CPO EXPORT VOLUME 1990-2007 (Source: BPS) 23 India is the most important destination for Indonesia‘s CPO export. Total volume of CPO exported to India reached 2.8 million tons or equal to 20.51 percent of total Indonesia‘s CPO export in 2006 (12.1 million tons). This amount decreased compared to export volume in 2004 (2.8 million tons) and 2005 (2.6 million tons). The other two important importers are China and the Netherlands. Export volume of Indonesia‘s CPO to China is growing rapidly. In 2002, total export volume to China was 0.5 million tons and increased to 1.8 million tons or 14.54 percent of total Indonesia‘s CPO export volume in 2006. Meanwhile, total export to the Netherlands in 2006 was 1.2 million tons or 10.02 percent. The percentage of CPO exports to the other countries is less than one percent. Asian countries are still the most important destinations for Indonesia‘s CPO exports. FIGURE 6: EXPORT VOLUME OF INDONESIA’S CPO TO MAIN DESTINATION COUNTRIES 2002-2006 24 The Indonesia‘s CPO export concentration has shifted from European countries to Asian countries. This shift is a logical consequence of faster economic growth and population in Asian countries. CPO consumption is highly related to the economic growth and population size, because more than half of consumer goods in the market are produced by using CPO as raw material, for both food and non-food products. This is possible because CPO can be categorized as a multifunction vegetable oil (Chandran, 2009). Recently, many countries have become the destinations of Indonesia‘s CPO exports. Indonesia‘s CPO has been accepted widely in the midst of negative issues and negative campaigns in the world market. However, continued increase of market expansion and production does not follow CPO price control in the world market. Rotterdam is still used as a standard of CPO price in the world market. The Government of Indonesia has made every effort to have its own price reference (Kompas, 24 April 2009). FIGURE 7: GROWTH RATE OF EXPORT VOLUME OF PLANTATION COMMODITIES IN INDONESIA 2003-2006 (Source: BPS) 25 Factors Affecting CPO Export Performance In microeconomic theory, demand for a product is mainly determined by that product‘s price and the price of other products. In the context of CPO, demand of CPO in the world market is influenced by the CPO price and the other vegetable oils prices. The soybean, sunflower, rapeseed, and coconut oils are the competitors of CPO. These oils are substituted one for the other, because all of them have almost similar contents and functions. The demand for products is also influenced by consumer income. Higher income is related to the higher demand for certain goods. However, the demand response on additional consumer income is not the same for all goods. The demand of Indonesia‘s CPO is assumed to be determined by per capita income of the main destination countries. The other variable which is assumed to have impact on CPO export is the exchange rate. In international trade, consumer preferences to buy CPO are sensitive to various negative issues and campaigns. There are two main subjects which are often revealed in the negative campaigns. The first issue is that the CPO consumption is a danger for health. The second issue is that the CPO is produced by destroying the environment, especially in land clearing. In addition to that, the increase of export financing is assumed to have a significant impact on the performance of Indonesia‘s CPO exports. Besides, deregulation policy is also considered as an important factor. The impact of all independent variables of the CPO export volume does not all take place in the same year. For example, a financing scheme provided to CPO producers and exporters will influence the performance of those producers and exporters in producing CPO within several years. To anticipate the existing of transmission periods, the time lags are also added into the estimation model. The estimation is undertaken by using the least squares approach for the 38 years data. After having many combinations of independent variables, finally, there are five variables which have significant impact on the CPO export volume. The five variables include export financing, CPO export price, negative campaigns, sunflower oil price, and soybean oil price. On the contrary, the independent variables which have no impact are domestic CPO price, domestic CPO consumption, CPO production volume, exchange rates, per capita GDP of the main importer countries, crude oil price, and deregulation policy. t t t t t t t x x x x x y c + + + ÷ ÷ + = ÷ ÷ ÷ ÷ 3 13 2 14 26 3 1 1 10 806 , 0 51 , 0 717 , 0 127 , 1 00007533 , 0 357 , 4 (2) where = t y Indonesia‘s CPO export performance which is proxy by export volume (ton), = it x Indonesia‘s CPO export price ($ per ton), = t x 10 export financing (billion rupiahs), = t x 13 soybean oil price in world market ($ per ton), = t x 14 sunflower oil price in world market ($ per ton), and = t x 26 negative campaign (dummy variable). The export financing has a positive impact on Indonesia‘s CPO export volume, while the CPO price has a negative impact. The small numberof coefficients indicate that CPO export volume is inelastic to the export financing. Based on this finding, the Government of Indonesia has to increase the provision of credit funds to the CPO producers and exporters. The export financing is urgently needed because there are extraordinary prospects of CPO in the world market. The performance of Indonesia‘s CPO export is influenced by globalization 26 and many foreign banks are willing to finance the CPO industry. Recently, there are a lot of CPO producers which have received credit facilities provided by national banks. The CPO export price has a negative impact on the CPO export volume. This finding is in line with the hypothesis which is derived from demand theory. However, the impact is only significant with a three years lag. The CPO export price does not have an instant impact on the change of CPO demand. It is also found that the CPO export volume is elastic to the CPO price in the world market. The increase of CPO price should be exploited by palm oil actors by accelerating export volume. The increase of CPO price can be determined by various factors include crude oil price or economic conditions. Until 2006, the CPO price is strongly determined by the other vegetable oil prices, especially soybean oil price. Since 2007, the dominant factor is the demand for biodiesel and the increase of crude oil price. If compared to the other vegetable oils, CPO is the most appropriate vegetable oil to replace crude oil as the energy source. The supply of Indonesia‘s CPO is basically sufficient, but only limited investors are willing to be involved in the biofuel industry. The subsidy on diesel fuel price is considered as the main obstacle. Price is one of the weakness points of Indonesia‘s CPO trading in the international market. National producers are facing a free market price mechanism which is influenced by various interests. Although Indonesia and Malaysia have contributed 80 percent of total world CPO, the two countries are price takers rather than price makers. The situation is almost the same even though market penetration of Indonesia and Malaysia are stronger. Uncontrollable prices are also caused by limited efforts provided by the government and CPO industries. There are no strategic policies provided to increase the bargaining position of Indonesia‘s palm oil products in the international market. Although there is a strong commitment to use Belawan and Dumai as the references for CPO standard price, however, no actual steps have been taken to do so. The ease of substitution among vegetable oils has increased the competition in the world market. This competition is often marked by negative campaigns in order to decrease the image of certain vegetable oils. The common themes of negative or black campaigns on Indonesia‘s CPO are high cholesterol and being non-environmental friendly in production processes. In many cases, negative campaigns have blocked the performance of Indonesia‘s CPO exports, especially to Europe and USA. These buyers are considered as pressure groups. The high intensity of negative campaigns has significant and negative impacts on the performance of Indonesia‘s CPO exports. This conclusion should be used as a reference for the government in order to improve the image of Indonesia‘s CPO in the world market. Best practice could be adopted from the Government of Malaysia which is very active in responding to negative issues on their CPO exports. The next independent variable which has a significant impact on the CPO export volume is the price of vegetable oils in the world market. The vegetable oils are represented by soybean and sunflower oils. The soybean oil price has significant impact with a three years lag, while the sunflower price is significant with a two years lag. However, the prices of coconut oil and rapeseed oil are not significant. In addition to that, the crude oil price is not significant also. The price of vegetable oils have an important role in the world oil market. According to the Oil World (Janurianto, 1998), total consumption of vegetable oils in 2007 reached 129.2 million tons or 84.06 percent of total world oil consumption. Meanwhile, total consumption of animal oils was only 24.5 million tons or equal to 15.94 percent. The share of CPO reached 37.99 million tons or 29.6 percent of total consumption of vegetable oils. The 27 share of CPO was slightly higher than the consumption of soybean that was 36.72 million tons or 28.6 percent. Total consumption of rapeseed oil was 18.43 million tons, while total consumption of sunflower oil was 11.17 million tons. Finally, total consumption of all other vegetable oils was 23.94 million tons or 18.7 percent. Either the price of soybean oil or sunflower oil have an inelastic relationship with the CPO export volume or the impact of soybean oil and sunflower oil prices is positive. This sign is different to the CPO price (negative). The Role of CPO Export in the National Economy The role of CPO in the national economy is showed by its export value share on total Indonesia‘s export value. The CPO export value tended to increase in the period of 1990- 2006, although there were decreases in 1998, 2000, and 2001. In 1990, total export value of Indonesia‘s CPO was $ 203.5 million. The export value then increased to $ 4.8 million in 2006. In 17 years, there was $ 4.6 million or 2,267 percent increase of CPO export value. A dramatic increase of the CPO export value created positive impacts on the development of the CPO industry as well as providing multiple effects on the economy in general. FIGURE 8: EXPORT VALUE OF INDONESIA’S CPO 1990-2006 (Source: BPS) There are three important points in time in the behavior of Indonesia‘s CPO export value in 1990-2006, that is 1997, 2002, and 2006. In those years, there are significant increases of CPO export value compared to previous periods. The CPO export value was $ 1.45 million in 1997 and then increased to $ 2.09 million in 2002. In 2006, the CPO export value reached $ 4.82 million. It is important to understand that the fluctuation of CPO export value is not only influenced by its export volume, but also by the world CPO price. FIGURE 9: PERCENTAGE CHANGE OF INDONESIA’S CPO EXPORT VALUE 1990-2006 (Source: BPS) 28 The highest increase of Indonesia‘s CPO export value occurred in 2002, which was 93.58 percent. Besides, a high increase percentage of CPO export value was also found in 1997 (72.2 percent). The CPO export value increased substantially in 1997, but then decreased sharply in 1998 (negative 48.46 percent). Afterwards, the CPO export value increased 49.51 percent in 1999, and decreased again in 2000 (2.42 percent) and 2001 (0.59 percent). FIGURE 10: EXPORT VALUE OF INDONESIA’S CPO TO MAIN DESTINATION COUNTRIES 2002-2006 (Source: BPS) India is the most important importing country. The export value to India reached $ 972.6 million or 20.19 percent of total Indonesia‘s CPO export value in 2006 ($ 4.8 billion). The other important contributor is China with a total CPO export value $ 707.5 million or 14.69 percent. Meanwhile, the CPO export value to the other countries is less than $ 500 million. The facts show that the demand for Indonesia‘s CPO exports is correlated with population size and per capita income. In addition, the majority of Indonesia‘s CPO export value is contributed by Asian countries. In the future, CPO trading should be focused in this region. TABLE 10. PERCENTAGE OF CPO EXPORT VALUE OF TOTAL EXPORT VALUE OF INDONESIA IN 2002-2006 Year CPO Export Value ($ Million) Total Export Value ($ Million) Percentage (%) 29 2002 2,092.4 57,158.8 3.66 2003 2,454.6 61,058.2 4.02 2004 3,441.8 71,584.6 4.81 2005 3,756.3 85.660,0 4.39 2006 4,817.6 100,798.6 4.78 Average 3,312.5 75,252.0 4.33 Source: BPS. The contribution of CPO export value was on average 4.33 percent of total export value of Indonesia in the period of 2002-2006. Although the CPO export value fluctuates every year, however, the other commodities have also grown in almost similar percentages. Because of that, the percentage of CPO export value on total export has not significantly changed. The role of CPO export is higher than that of other plantation commodities. Processed rubber is the only commodity which has an export value close to the CPO export value. The average contribution of processed rubber is 2.57 percent in the same period. Meanwhile, the share of export value of coffee, tea, tobacco, and cocoa are less than one percent of total export value of Indonesia. FIGURE 11: THE PERCENTAGE OF EXPORT VALUE OF PLANTATION COMMODITIES IN INDONESIA 2002-2006 (Source: BPS) Global Economic Crisis The CPO performance and role in the Indonesia‘s economy have been challenged by the global economic crisis which occurred in 2007-2008. The crisis brought various negative impacts to the economy of developed, developing, and less developed countries. The signal of crisis had been visible since March 2007 when the property markets in the USA were facing huge non-performing loan problems. The problems was then influenced many big financial companies, such as Lehman Brother and others. The total assets of many international financial companies have declined. For instance, total asset of Citigroup declined from $ 255 billion in the second quarter of 2007 to only $ 19 billion in January 2009. Total assets of HSBC also declined from $ 215 billion to $ 97 billion, while the total assets of JP Morgan declined from $ 165 billion to $ 85 billion in the same period. The other important financial institutions which faced similar problems include RBS (from $ 120 billion to $ 4.6 billion), UBS (from $ 116 billion to $ 35 billion), Santander (from $ 116 billion to $ 64 billion), BNP Paribas (from $ 108 billion to $ 32.5 billion), and Goldman Sachs (from $100 to $35 billion). In addition to that, the total assets of many other 30 financial institutions such as Morgan Stanley, Deustche Bank, Credit Agricole, Societe Generale, Barclays, Unicredit, and Credit Suisse, also declined. The impact of the global crisis are so severe so as many companies including USA, England, Spain, and France reduced their work forces and the unemployment rate rose. Citigroup for example,discharged 52,000 employees, while the Bank of America discharged 35,000 employees. In England, the Nissan Motor discharged 5,000 employees, while Honda took similar action by discharging 3,000 employees. Furthermore, electronic companies including Sony, Microsoft, and Motorola discharged 18,000 employees, 5,000 employees, and 4,000 employees, respectively. The decrease of economic activities in developed countries was represented by the low and even negative GNP growth rated in 2008 and 2009. The economic growth of the USA contracted from 4.4 percent in January 2008 to minus 1.6 in January 2009. In the same period, the average economic growth of European countries declined from 1.9 percent to minus 2.0. In Asia, Japan experienced the worst economic growth, which declined from 1.7 percent to minus 2.6 percent. The economic growth of China, India, and ASEAN countries was also decreased , but still remained positive. TABLE 11. WORLD GNP GROWTH IN JANUARY 2008-JANUARY 2009 No. Country/Region GNP Growth (%) January 2008 October 2008 November 2008 January 2009 1. World 4.4 3.0 2.2 0.5 2. USA 1.8 0.1 -0.7 -1.6 3. Europe 1.9 0.2 -0.7 -2.0 4. Japan 1.7 0.5 -0.2 -2.6 5. China 10.0 9.3 8.5 6.7 6. India 8.2 6.9 6.3 5.1 7. ASEAN-5 6.2 4.9 4.2 2.7 Source: Coordinating Ministry of Economics Republic of Indonesia (2009) The worst economic performance of developed countries decreased the world trading volume including CPO. In January 2008, the growth rate of world trading volume was approximately 6.9 percent (year on year), but in November 2008, the growth rate declined into 2.1 percent. Furthermore, the growth rate of world trading volume became minus 2.8 percent in January 2009. Indonesia‘s exports also declined, especially since June 2008. The most drastic decrease of export volume and value occurred in December 2008. The decrease of exports was mainly caused by the decrease of demand for various export commodities by consumers in developed countries. The decline of demand gradually decreased all commodity prices in the world market. According to the Ministry of Industry, Republic of Indonesia, the most sharp decline was faced by agricultural commodities, manufactured products, and mining. The degree of the crisis‘ impact on each commodity was basically determined by its market orientation. Commodities with higher export shares faced higher impacts of the global economic crisis, and the reverse. According to BPS, approximately 89 percent of plantation commodities in Indonesia still had domestic market orientation and grew 2.5 percent in 2009. Only 11 percent of those commodities were export oriented. However, if analyzed in detail, most of the Indonesia‘s strategic commodities have had higher percentages of exports. 31 Approximately 75 percent of CPO, for example, have been exported to meet international demand and only about 25 percent are sold in the domestic market, especially to fulfill the demand of the cooking oil industry. Recent CPO Export Fluctuation The global crisis had a direct impact on the performance of Indonesia‘s CPO export volume and value in 2008. For instance, India cancelled their order by 300.000 tons of Indonesian CPO at the end of 2008. This cancellation inflicted CPO exporters in Indonesia with the financial loss of approximately $ 300-400 million (Koran Tempo, 4 March 2008). Apart from the global crisis, there was also an environmental issue related to CPO exports, which is the European Union Directive. The EU Directive on Renewable Energy which is adopted by European countries has restricted CPO consumption for biodiesel and bioethanol. Although, the Netherlands is increasing their investments up to £ 150 million to support the development of second generation biofuel industry with the production target of 200 million litres of ethanol per annum (Amri, 2009). The export volume of Indonesia in 2009 was similar to 2008, which was approximately 1-1.4 million tons per month. In January 2009, total exports of CPO to India, China, and European Union was 1.4 million tons. In the European market, the share of Indonesia‘s CPO declined from approximately 15 percent in 2005 to only 9 percent in 2008. In 2005, Indonesia exported 2.5 million tons of CPO to various countries in Europe through the Rotterdam port. That amount of CPO was reduced approximately 50 percent to only 1.2 million ton in 2008. As an alternative, some of Indonesia‘s CPO exporters expanded their markets to ex Soviet Union, Eastern Europe, Middle East, and Asia Pacific. A sharp fluctuation in 2008 was also experienced by the CPO export price. The CPO price in the international market increased every month from January 2007 to March 2008. The increase was basically caused by the increase of world demand for CPO and its derivative products. According to Chandran (2009), the increase of consumption occurred because the CPO is: (1) feeding the world: palm oil consumed in over 150 countries; (2) provides crucial source of food and energy supplies to developing world; (3) scientifically proven nutritional and health benefits and durability; (4) provides bio-energy: environmentally-friendly alternative fuel source to supplement decreasing high carbon fossil fuels; and (5) highly productive: significantly more palm oil produced per hectare compared to other oil seed crops. Furthermore, CPO is classified as ―highly efficient producers of oil and require less land then other oil crops‖. FIGURE 12: WORLD CPO PRICE 2007-2008 (Source: Indonesia Eximbank) 32 Productivity of CPO is more than ten times compared to the other vegetable oils. Each year, palm oil plants can produce on average 3.66 tons per ha, while soybean, sunflower, and rapeseed oils can only produce 0.36 tons per ha, 0.46 tons per ha, and 0.60 tons per ha, respectively. Inputs required to produce CPO is also 3.8 lower than the other vegetable oils (Oil World Annual 2008). After reaching the peak on March 2008, the CPO price in the world market decreased, although there were slight increases in May and June 2008. The price decline continued until until November 2008 ($ 433.1 per ton). In December 2008, there was a reversal of the world CPO price, although the global economic crisis was still taking place. The price recovery was continuing at the beginning of 2009, because the economic slow down had reached its bottom-line. Most of the export prices of Indonesia‘s primary products started to increase including rubber, coffee, and CPO (Kompas, 2 June 2009). The negative impact of CPO price fluctuation was not only experienced by producers in Indonesia, but also in Malaysia .The CPO price fluctuation indicated was not only influenced by the world economy conditions, but also by speculative actions. According to Bloomberg, the CPO price in Rotterdam port reached its peak on March 2008 ($ 1,395 per ton). This price level is the highest in the history of CPO trading. Afterwards, within 8 months, the CPO price declined to $ 435 per ton in 29 October 2008. The CPO price then improved gradually to $ 540 per ton in 31 December 2008 and finally reached $ 800 per ton on 15 May 2009. Amri (2009), a Citigroup analyst, has agued that the improvement of Indonesia‘s and Malaysia‘s CPO export prices is encouraged by the reduction of CPO stocks in both countries. CPO stoks in Malaysia have declined from 1.5 million tons to 1.36 million tons in April 2009. In the same period, CPO stocks in Indonesia has decreased from 1.2 million tons to 0.8 million tons. Besides, the increase of world CPO price is also caused by the decrease of soybean production in Argentina (dry season). The other important factor is the increase of CPO demand from India. India‘s importers have increased their demand in order to anticipate import tariff policy changes which were planned to be implemented in June 2009. In March 2009, India‘s importers imported 641.141 tons of CPO. This amount of CPO increased by 28 percent if compared to the import volume for March 2008. Prospect of CPO Export CPO is the most important plantation commodity in Indonesia, especially for export. On the demand side, the performance of Indonesia‘s CPO export is highly dependent on the level of consumption of importer countries. Foreign demand is very important, because more than 75 percent of Indonesia‘s CPO were exported in 2008 (19.2 million tons). 33 The demand of CPO for food and non-food products recovered at the beginning of 2009. Chandran (2009) has written that CPO has became more important in the international commodity trading, because CPO is: (1) a highly versatile vegetable oil; (2) used in many food and non-food products; (3) produced in tropical countries; (4) rapidly growing market share; and (5) world‘s top selling vegetable oil. Chandran also emphasized that ―palm oil is used in more than half of the packaged products in supermarkets today‖. World Oil has stated that the contribution of CPO had reached 25.5 percent of total oil and fat consumption in the world market in 2008. Meanwhile, the share of soybean, rapeseed, sunflower, and other oils are 24.8 percent, 12.2 percent, 6.2 percent, and 31.3 percent, respectively. Asian countries are the main importers of the world CPO. In May 2008, total imports of CPO in Asian countries were 55 percent of total CPO in the world market. This percentage is much higher than total CPO imports by European Union (16 percent), Africa (12 percent), and other countries (17 percent). The most important importer in Asia is China with the share of 18 percent. India and Pakistan are the next two largest CPO importers with the share of 13 percent and 7 percent of total CPO import by Asian countries. The analysis shows that CPO exports are likely to significantly increase in the future. However, there are various challenges and problems which have to be solved. With the total plantation area of 6.7 million hectares, there are 1.3 million workers involved in the palm oil industries in Indonesia. Furthermore, if the revitalization of national palm oil plantation (targeted 2 million hectares) succeeds, there will be jobs available for about 340,000 workers in 2011 (Amri, 2009). According to the InfoSAWIT magazine, total employment absorbed at the upstream side of palm oil plantation has reached 2,225,050 people in 2009. About 911,600 people are working in the private and state-owned palm oil plantations and 1,250,000 people are farmers. In addition to that, 63,450 people are working in palm oil factories. At the intermediate industry level, , approximately 24,000 people are working in cooking oil factories. Meanwhile, in the downstream industries, 3.300 people are working in the biodiesel industry and 4.000 people are working in the olechemical industry. Learning from the previous trends, Chandran (2009) has projected that the average oil and fat consumption of the world population will reach 25 kg per capita in 2010. This amount has increased from 21.4 kg per capita in 2005. In 2015, the oil and fat consumption is predicted to increase to 27 kg per capita and to reach 30 kg per capita in 2020. To meet the demand, about 200 milion tons of oils and 234 million tons of fats have to be produced. More than half the quantity of oils demanded is CPO. Indonesia and Malysia are undertaking various efforts to accelerate CPO production. Total additional plantation area in the two countries is 0.7 million hectares per annum. From that amount, about 450.000 hectares per annum or 64.29 percent are located in Indonesia. CONCLUSION 1. The export volume of Indonesia‘s CPO grew on average 22.11 percent per annum in the period of 1990-2007, although this become slower in the last three years. In the middle and at the end of 2008, CPO export volume had decreased drastically as an impact of the global economic crisis. CPO export volume then recovered and increased since the beginning of 2009. 2. The government policies, up till now, have not fully supported the development of the national palm oil industry. The imposition of an export tax has burdened the CPO producers and has also changed frequently in a very short time. Besides, most of export 34 tax is not reallocated sufficiently to support the development of a modern and more productive palm oil industry. The government did not have specific policies to reduce negative issues and campaigns which hampers the increase of CPO exports 3. The export volume of Indonesia‘s CPO is inelastic and is influenced significantly and positively by export financing with a one year lag period. 4. The world CPO price has a significant and negative impact on the CPO export volume with a three years lag period. 5. The negative campaigns have a significant and negative impact on the CPO export volume. As the increase of negative campaigns intensity they will decrease Indonesia‘s CPO export volume. 6. The sunflower and soybean prices in the world market are inelastic and have significant and positive impacts on the CPO export volume with three years lag period. 7. CPO price in the domestic market, CPO domestic consumption, CPO production volume, exchange rate, per capita GDP of main destination countries, crude oil price, and deregulation policy have no impact on the CPO export volume. 8. The performance of Indonesia‘s CPO exports was influenced by the global crisis. The world demand for CPO decreased sharply since the mid of 2008 but then recovered at the beginning of 2009. 9. The export volume of Indonesia‘s CPO is predicted to increase continuously in the coming years, although not as high as in the period of 1990-2006 (27.13 percent per annum). 10. Abundant land (31.8 million hectares) are still available to support the expansion of palm oil plantations in Indonesia. 11. Total volume of Indonesia‘s CPO production has exceeded Malaysia in 2007. 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Oil Palm Industry Economic Journal, 6, 1, pp. 18-29. 41 FOOD SECURITY POLICY: A CASE OF MALUKU ISLANDS, INDONESIA Wardis Girsang Pattimura University Ambon, Indonesia Jl. M.Putuhena-Poka Campus Ambon, Maluku Phone 081343480807; e-mail address:
[email protected] ABSTRACT National rice food policy has challenged the sustainability of local food security. The aim of this paper is to study rice and non-rice food policy in Maluku. It can be argued that the impact of national food policy on local food security can be seen in terms of improving rice production but also stagnant productivity and increasing imports. Consumption pattern has changed from non-rice base to rice but they are not ready to afford rice and rice prices. It is recommended that food security policy should prioritize on improving productivity and production of rice as well as non-rice food crops to reduce and substitute import. Keywords: Food policy, poverty, food security, small islands INTRODUCTION The global financial crisis has followed global fuel and food crises. In some countries the food crisis has become more serious when climate change occurring at the same time. The climate change causes a longer dry season or rainy season and indirectly changes cultivating patterns of farmers. As a consequence, production of food crops has decreased significantly and food shortages cause food prices to increase considerably. Government policy created investment in order to create job opportunities and rice food market operation to maintain a low rice price. The global financial crisis on the agricultural sector in Indonesia probably has not had a greater impact of the multi-dimension crisis that occurred in 1998. Nevertheless, the global financial crisis has restricted financial investment in the agricultural sector particularly for food crop investment at the local level (provincial, district and rural). In Maluku province, lack of financial investment which was followed by climate change (longer dry season, water shortages or floods) has a considerable negative impact on problems of low food crop production, low per capita of Gross Regional Domestic Product and a high poverty rate. The contribution of the agricultural sector to GRDP of Maluku province was 35% and approximately of 8% came from food crops. In fact, most of the poor households (peasants) are farmers who work in rural areas and in agriculture. The progress of a peasant‘s farm or business tends to be stagnant. They do not have a strong economic institution to foster their bargaining position in facing local and national traders. As a result farmers (peasants) fail to improve household income and most live below the poverty line. The poverty rate level of Maluku has decreased gradually in the last five years from 35% to 29% but this is still quite a higher poverty rate than that of Indonesia of approximately 15%. The term ―poverty‖ means absolute poverty that is the inability of a household to address household members‘ basic needs both for food and for non-food items. In this paper, poverty 42 relates to the threat of food security that is the ability (accessibility) of all households to buy food. In this case as long as households have purchasing power, the link between self sufficiency and food security is not compulsory (Solahuddin, 2009). In fact, the real problem situation is not only inability of households to buy food but also food production insufficiency and limited access to afford staple food. FIGURE 1 POVERTY LEVEL RATE IN MALUKU PROVINCE, 2002-2008 The poverty and food security threat in Maluku can be understood also from the level of per capita Gross Regional Domestic Product. GDRP per capita in Maluku is approximately 4 million rupiahs in 2010 but this is lower than the national level or that of South Sulawesi GDRP per capita (Rp10 millions) and almost the same as the Gorontalo province level. The average value of GDRP per capita might be questioned as there is a social economic gap between urban and rural areas, transmigration and non-transmigration areas as well as where there are big industries and small scale industries. Based on a regional development perspective (Bappeda, 2009), as long as there is no extraordinary effort of local government and the private sector on export competitive products, Maluku province tends to be a less developed region compared with Gorontalo province and the other provinces in the eastern part of Indonesia. PROBLEMS The problems of poverty and threats to food security has been taken place in Maluku where most of the 1.440 million people live in small islands with abundant natural resources but low incomes and limited transportation and communication infrastructures. The poverty level is still difficult to reduce whereas GDRP per capita is still difficult to be accelerated. The food price tends to increase and rice for the poor program is forced continually to substitute 43 local staple food scarcity. As a result local people, except for households in remote areas still find it difficult to get access to rice, and have been from dependence on 100% rice consumption to consuming substitutes of local staple foods such as sago, tubers, cassava and corn (Thenu, 2004; Tambunan, 2005; Girsang, 2008). This means rice is the primary food whereas non-rice is the secondary priority. This is a great change of staple food habits but represents a threat to local staple food security and dignity in Maluku. The research questions are: (a) how is local government policy to solve the problem of the food crop (rice) scarcity?; (b) how do local people develop strategies to face the threat of local staple food security in terms of their lack of income and access to afford the staple food? (rice); (c) how to develop a sustainable food security policy in Maluku province? METHODOLOGY The scope of this research is limited toMaluku province. Most of secondary data was collected from Statistical Centre Agency of Maluku whereas primary data was obtained from field work and observation at the village and household level in Maluku province. Respondents are local government staff and heads of households in rural areas where accessibility to staple food is quite difficult. Data was processed and analyzed both quantitatively and qualitatively in order to provide possible answer to the research questions. RICE POLICY STRATEGY Food policy focuses on rice only as it becomes more important as the staple food to substitute non-rice staple food in Maluku. Besides, national and local government prefers to develop rice crop as the primary priority rather than non-rice crops. The rice crop can be divided into two types, that is the wet land rice crop and the up land rice crop. In the last 10 years, the harvest area of wet land rice crops has increased more than three fold significantly from approximately 5000 hectares in 2000 to approximately 16000 hectares in 2009. At the same time, total wet land rice production has increased significantly more than five times from 12000 tons to almost of 70000 tons. The harvest area of upland rice has also increased two fold from approximately 1500 hectares to almost 3000 hectares but total annual production has fluctuated between 2000 tons and 6000 tons. Besides the harvest area and total production, productivity of rice is pivotal to understand. In the last ten years, productivity of wet land rice has fluctuated between 3 tons/ha and 4.25 tons/ha or an average 3.5 tons/ha, whereas upland rice productivity is between 1.75 ton/ha and 2.25 tons/ha or an average of 2 tons/ha. This productivity is lower than wet land rice productivity in Java that is 4.5 tons/ha. The main constraint is limited access to irrigation water infrastructure as well as prime seeds, farmer knowledge and skill, and input production technology improvement for low fertility land. FIGURE 2 WET LAND RICE HARVESTING AREA AND PRODUCTION IN MALUKU, 2000-2009 44 FIGURE 3 UPLAND RICE HARVESTING AREA AND PRODUCTION IN MALUKU, 2000-2009 Figure 2 and 3 show that the way of enhancing rice production could be achieved by intensive and extensive strategies. However, extensive strategy is more relevant compared to intensive strategy. The reason is clear that intensifying strategy was unable to improve by more than 4.25 tons/ha for wet land rice and 2.25 tons/ha for upland rice. The rice crop productivity in transmigration area has indicated a leveling off production. This means that by using all conventional input production, rice productivity is difficult to improve to more than 4.25 tons/ha, otherwise, rice production tends to decrease. Figure 4 shows the total production of rice in Maluku province in the last 10 years. Wet land rice production has increased significantly whereas upland rice tends to increase gradually or is stagnant. The harvest area of wet land rice increased 3 fold in 2000 and almost 6 fold in 2009. The implication is that total production of wet land rice was 3 fold in 2000 and about 10 times in 2009. In short, total production of rice both wet land and upland in Maluku has increased from 15000 tons to almost 75000 tons in 2009. The next question is is this production enough or sufficient to fulfill rice demand in Maluku? To answer the question it is important to know the other sources of rice in Maluku that is the total import of rice from outside Maluku province. In the last 5 years (2004-2009) rice supply in Maluku came from local production and imports. In 2004, the total of imported rice was three fold that of local rice production, 120,000 tons. Then imported rice decreased gradually up to 2006 where rice imports were equal with local rice production which was 45 50,000 tons. In the last three years (2006-2009) the total of imported rice was less than the total production of local rice. Therefore, the total actual demand of rice in Maluku fluctuates between 110,000 tons and 160,000 tons per annum. FIGURE 4 TOTAL PRODUCTION WET LAND AND UPLAND RICE IN MALUKU, 2000-2009 In 2009 the real demand of rice in Maluku was 144,000 tons where 75,000 tons was from local production (farmer) and the other 69,000 tons from imported rice. If the price of imported rice is of Rp6000/kg, the value of imported rice per year is approximately Rp414 billion. This value is almost the same as the Maluku provincial government budget in 2010 which was 459.6 billion. It seems that imported rice policy is still used by national and local government (Tambunan, 2003). In the short term this policy might be relevant but in the long term Maluku needs to substitute imported rice with local rice production and non-rice foods. If all the Maluku population consumes rice as its staple food consistently, the total demand of rice will increase from approximately 150,000 tons in 2004 up to 175,000 tons in 2009. In fact rice consumption fluctuated between 110,000 ton and 160,000 ton. This probably means that some Maluku people still consume non-rice foods of between 15,000 tons and 40,000 ton per year. In 2009 there was approximately 25,000 ton of rice that was not consumed by provincial people. If 120 kg/capita/year is accepted as a general standard of rice consumption, there are probably about 208,333 people or approximately 15% of the Maluku population of 1.440 million that still consume non-rice staple foods. Based on this data, it can be argued that approximately t 85% of the Maluku population consumed rice as the staple food whereas the rest 15% still consume rice and non-rice or still continuously consume non- rice staple foods like combinations of sago, tubers, cassava and corn. This number will tend to increase in the future because government policy on rice for the poor, low price rice, consumer preference, simplicity and privilege of rice still continue to be compared with other local non-rice staple foods. FIGURE 5 TOTAL PRODUCTION OF LOCAL RICE PRODUCTION AND IMPORT RICE IN MALUKU, 2004-2009 46 What does this mean? First, the shape of food habits of Maluku people has changed significantly and this change is based on economic reasons.The population in Maluku has become more plural and most of them prefer to adapt with and consume rice as the staple food rather than non-rice food. Second, as the consequence of this is that the central and local government as well as the rice farmer has to supply rice both from enhancing local production and from imports. The problem of local production is not only lack of fertile soil for wet land rice cropping but also rice distribution constraints from production sites to small islands where the span of control is quite risky as it lacks sea transportation infrastructure. Wet land rice production is only found in two islands, i.e Seram and Buru islands or in four districts of 11 district and city in Maluku province. These districts that produce wet land rice are the districts of Buru, Eastern Seram, Central Maluku and Western Seram. Among all of these districts, Eastern and Buru are two regions that have the possibility to expand the wet land rice crop. The distance and lack of transportation and communication infrastructure creates high transportation costs and higher prices of rice. To some extent rice may be unable to be transported because of weather problems especially during the rough seas between January and March. In this case, dependency on rice will become dangerous for people in small islands who have no arable land and lack skill to cultivate a rice crop. TABLE 1 POPULATION OF MALUKU PROVINCE AND ESTIMATION OF RICE CONSUMPTION IN DISTRICT AND CITY No District/ City People Percent Estimated rice consumption need in 2008 (ton) 1 South Buru 51,754 3.59 6,210 2 Tual City 53,323 3.70 6,399 47 3 Maluku Barat Daya 69,612 4.83 8,353 4 Kepulauan Aru 80,140 5.57 9,617 5 East Seram 85,353 5.93 10,242 6 Western Southeast Maluku 93,621 6.50 11,235 7 Buru 94,116 6.54 11,294 8 Southeast Maluku 102,991 7.15 12,359 9 West Seram 158,937 11.04 19,072 10 Ambon City 281,293 19.53 33,755 11 Central Maluku 368,874 25.62 44,265 Total-Maluku 1,440,014 100.00 172,802 Source: BPS, 2009 (bold: Districts rice production centre) Third, as a consequence of rice policy local government to expand and open new wet land rice in Maluku, central and local government would have to provide considerable funds to buy rice each year. The value of this money is sometimes as much as the total local government budget. It means that food security is a necessary condition for regional development though it involves a high cost program. Rice is not only a staple food for the Indonesian population but it is also a political commodity. The price of rice is kept low so that all the population is able to access it, particularly low income households both in rural and urban areas. In short, keeping the price of rice stable in order to maintain social and political stabilization. Fourth, as productivity has achieved a leveling off and there is irrigation water limitation, to open and a create new wet land area is sometimes the only choice to increase rice production in Maluku. Soil structure and weather as well as the environment of small islands in Maluku are considerably different from continental islands like Java, Sumatera, Sulawesi and Papua. Once leveling off of production occurs, it takes time and extraordinary effort to improve productivity. Otherwise, establishing new land is the only way to increase production. Fifth, the consequence of this is not only high cost to establish new rice land but also large areas of sago forest will be cut off and substituted to make new wet rice land development. This is reasonable as most of the flat area and access to water is sago forest. Nowadays this is a debatable issue in Maluku province. On one hand this makes sense to the pro-rice staple food but it is a serious threat for people who want to maintain non-rice based staple food and to keep the role of sago forest as a source of water, reduce soil erosion and cultural staple food identity in the small islands. Moreover a wet land rice crop will change the micro- weather pattern, and high usage of chemical fertilizer will create soil depletion and this will change the environment of both land and sea of small islands. The other serious issue is social and cultural jealousy that probably creates competition, controversy and latent conflict. Wet land rice development policy was limited only for migrants (transmigration) people who came from outside of Maluku. Local people have no background skill to cultivating wet land rice. The transmigration program was tarted in 1950‘s in West Seram but there are almost no local people becoming wet land rice farmers. 48 The next issue is that the transmigration program is not only a strategy to increase production through expanding wet land rice but also to increase the number of people from outside Maluku. The problems occur at the same time when there is no similar rice policy development focus for local (original) people who work for an upland rice crop and non-rice crops. These issues need to be revisited as a main consideration of wet land rice development in Maluku province. Finally, there is no guarantee that enhancing rice crop production will improve farmer household income. This is a serious problem. The purpose of food security policy is not only to improve production and productivity but also to improve farmer income through enhancing added value, product competitiveness and reduce unemployment and poverty. These issues have not yet addressed as the main part of food security policies. Therefore land clearing to create and establish new wet rice land in Maluku province, rather than intensifying wet land and upland rice crop, as the grand strategy of local and national government for rice crop development in the future should be done carefully, step-by-step and continuously. Involving local people to plan and implement the development of wet land rice is pivotal for sustainable development (Girsang, 2009). As long as it is possible, an upland rice crop should to be developed as a prime priority just the same as wet land rice crop. The main priority for local staple food crops that need to be developed in Maluku are sago, corn and cassava/tubers. There is about of 31,000 ha of sago forest that are able to produce about 500,000 tons of dry sago flour per year and 44,750 ha of potential dry land for corn, cassava and upland rice (BPS, 2009). HOUSEHOLD NON-RICE FOOD SECURITY STRATEGIES The previous topic discussed rice harvest area, production and impors to fulfill rice demand in Maluku province. In short, rice production in Maluku was lower than demand so that government must import rice from outside Maluku. Most of imported rice was part of rice for the poor program. To maintain rice stocks and demand in Maluku, the policy of central and local government was to expand rice land and to increase imports. How was household strategy to face food security threats at the local or village level? According to Maluku Province Agricultural Office (2008), the main problems of farmers are: (1) low production and productivity; (2) limited agricultural technology and infrastructure; (3) low farmer knowledge and skill; (4) lack of financial capital; (5) lack of farmer institutional development; and (6) remote area in small islands. These problems interrelate with each other and influence directly on household food security. Based on field observation, farmer households in non-rice based villages still consume non- rice foods as staple foods such as corn, sago flour, cassava and wheat flour. The main constraint to afford non-rice staple foods is an unpredictable and longer dry season. In the last 5 years farmers say that the pattern of the weather has changed and is difficult to estimate. As a result farmers may fail to get harvest because of lack of water. Table 2 describes staple food in Liang village-Ambon island and Kisar island. Liang village has rice as a staple food whereas Kisar island has corn as a staple food. Liang village is representative of villages in Ambon island which has easy access to Ambon city. Kisar island 49 can be said to be representative of remote areas which are far from the capital or provincial capital city. In this case, the farmer household still maintains corn as the staple food, while peanuts and cassava (tubers) are used as additional foods. In can be argued that rice is the staple food for households in villages which are nearer the district capital city. TABLE 2 STAPLE FOOD IN TWO VILLAGES BASED ON HEAD OF HOUSEHOLD OCCUPATION IN MALUKU Main occupation of household head Liang village-Ambon island (n=22) Kisar island (n=100) Staple food (%) Additional food (%) Staple food (%) Additional food (%) Rice Tubers Tubers + sago Banana Rice, cassava and sago Corn Peanuts Cassava and tubers Farmer 100 0 67 0 67 100 70 65 Fishermen 100 33 0 33 67 100 70 65 Small industry 100 0 0 0 0 60 40 50 Trader 100 50 0 0 50 40 30 40 Average 100 20.75 16.75 8.25 46 75 52.5 55 Source: Field work, 2008 In the dry region part of Maluku, Babar and Kisar islands, rural people face the problem of food scarcity. The scarcity of staple food may happen every week, month or many times in a year. Head of households said that they face food scarcity every week, month and year. There were 64% of households that have no staple food stock at home many times in a year. Then, approximately 53% of households have few staple food stocks at home in every week. Next, it was 85% of households which had a lack of nutritious food in every week. Kisar island is a dry region compared to Babar island. Both islands lie in the eastern part of Maluku and are remote from Ambon city. For a long time, local staple food has been corn flour and peanuts combined with cassava and tubers. They might have no serious experience of starvation or food crisis but the issue is that they have not enough food nutrition. Therefore, food security is not only about food sufficiency, accessibility and distribution but also food safety and nutrition. Natural resources of food crop may be abundant in the farm, forest and sea shore but rural communities have a tradition and food habit to avoid eating certain crops or vegetables. Besides, each household has a strategy to face a food shortage problem. This strategy is called coping strategies. Food shortage occurs when farmers face unpredictable seasons or a long dry season. Generally, farmers keep food at home after the harvest season because they have not enough cash money to buy food from the market. 50 TABLE 3 FOOD SCARCITY INDICATOR AT HOUSEHOLD LEVEL IN BABAR AND KISAR ISLANDS Food scarcity indicators Babar island (n=100) Kisar island (n=100) A. No staple food stock 1. Almost every week 28 9 2. Almost every month 6 47 3. Many time in a year 64 27 B. Few staple food stock 1. Almost every week 53 6 2. Almost every month 8 49 3. Many time in a year 36 32 C. Lack of nutrition food 1. Almost every week 85 14 2. Almost every month 8 37 3. Many time in a year 4 35 Source: Field work, 2008 Table 4 shows the copying strategies of rural household facing food shortages during the dry season. In general, there were 5 copying strategies of each household facing a food crisis or a food shortage problem. First, if households have cash money, they will change the staple food from the high price to the cheaper. As mentioned , the main problem of poverty in Maluku is low incomes and lack of access to cash money. Therefore they will buy the cheaper food when they face a food crisis. Almost all of food crops are used by farmers to fulfill household members‘ consumption and to provide food stocks for the next season. Therefore, it is difficult for farmers to get cash money from food crops. TABLE 4 COPING STRATEGIES OF HOUSEHOLDS DURING FOOD SHORTAGE SITUATION Strategy during food crisis Babar islands (%) (n=100) Kisar islands (%) (n=100) 1. Substitute staple food to a cheaper one 94 88 2. Reduce quantity of staple food 40 40 3. Reduce daily meal frequency 36 16 4. Reduce children food portion 40 39 5. Borrow (money, food) from kinship or neighbors 32 40 Second, if households have no cash money, they will reduce the quantity of staple food for the whole family members particularly the children. This implies that children are the first 51 people that will receive a direct impact of a household food crisis. The main indicator is that children weigh less than normal because they lack nutritious food. Third, if households have no cash money and insufficient food at home, they will reduce daily meal frequency. Normally, each household member eats three times a day but now they will reduce to twice or once a day. A specific strategy is to avoid harvest of the rest of the limited supply of cassava or tubers on dry farm once at the time. Farmer will harvest cassava or tubers step-by-step until they cultivate crops that probably will be harvested in the next season. This is pivotal as there is no alternative food stock in farms and at home. The last coping strategy is to borrow money or food from brothers, kinship or neighbors. In villages, brothers, kinship relationship and neighbors are important as social insurance as well as a place to get aid or assistance during a difficult time. It can be understood that rural people maintain good relationships with each other because they realize that they are interdependent with each other during the good or bad times. POLICY STRATEGY FOR FOOD SECURITY The previous part of this paper has discussed production to achieve food sufficiency and security in Maluku province and a staple food pattern as well as coping strategies of household to face a food crisis. The Agricultural Agency Province of Maluku says that rice production will increase approximately 29%, to achieve energy per capita around 2200 kilo calories and 57 grams of protein per day target of rice production including enhancing the agricultural sector contribution to Gross Domestic Regional Product of 1% per year and improving farmer terms of trade to more than 100. In addition, the Agricultural Agency of Maluku Province (2008) said that the existing condition of the harvest area of the rice crop in 2008 was 19,142 ha. If it is assumed that productivity is approximately 3.96 ton/ha, total production would achieve around 75,826 ton in 2008. Then, it was predicted that the area of harvest area would expand to 21,196 ha and productivity increase to 4.01 ton/ha in 2009 and 4.25 ton/ha in 2010. Therefore, total production in 2010 would be targeted at approximately 82,586 tons. The question is how to achieve all of these program targets by developing a sustainable policy strategy for food security. In this situation analysis, it is pivotal to develop relevant policy strategies for food security in Maluku province. The Agricultural agency of Maluku province has developed strategies to increase rice production as well as animal husbandry, upland crops and plantation crops. In fact, local government policy would like to focus on wet land rice crop development compared to the other crops. Food security could not be based on rice only but it must be integrated with the other food crops by designing a comprehensive policy or food security road map (Puspoyo, 2006). It can be argued that local government needs to build non-rice food estates especially upland rice, corn and soybean (peanuts) as the government has done for wet land rice crops in transmigration areas. A food security road map policy is also needed to integrate with rural economic development in order to alleviate poverty in rural areas. Therefore, a food security policy focus should be based on flour (Welirang, 2006) in order to fulfill not only macro nutrition (energy and protein) but also micro nutrition (vitamin 52 A, iodium, Fe). This implies that the food security road map needs to arrange comprehensively through building an economic scale of food estates followed by integrated flour industries development. In order to develop an integrated and sustainable food security in Maluku in the future, there are some important strategies. First is an intensifying strategy. It may be possible that productivity has faced a leveling off production and soil depletion. Therefore, research is needed in order to know the specific factors for influencing productivity. Research findings would recommend specific key success factors to improve rice productivity for both wet and upland rice productivity. The second strategy is an expansion strategy. The main priority of an expansion strategy is allocating new land for rice crops. This strategy is risky and high cost in terms of cultural, economic and environmental issues. In fact, this strategy may be the only possible choice to increase production significantly in the short term. The third strategy is institutional development and agricultural funds. The focus of this strategy is farmer institutional revitalization in order to foster capacity and bargaining positions toward the local and national market. Farmer organizations need access to financial institutions in order to get credit or funds for agribusiness investment. One village one extension agent is the main priority for farmer empowerment. The fourth is production safety strategy. The main program is to reduce pests and disease constraints, to reduce harvesting loss and to adapt to unpredictable weather. Rice milling (processing) Unit is pivotal to develop for wet land rice farmers in order to reduce economic losses of rice harvesting. The fifth is import strategy. Local production of rice has not been sufficient yet to fulfill rice demand in Maluku province. Therefore, imported rice is still the only way to address rice demand in Maluku including rice for the poor. In the long term, imports must be substituted by local farmer in Maluku. The sixth is food security based on flour, macro (carbohydrate) and micro nutrition strategy. Food security should be based on flour and carbohydrates that can be found from rice, tubers, corn and cassava. This implies that food estates and food agro-industries need to develop as the basis of food security in the future in Maluku. Thus, food security is not only based on rice but also on non-rice crop products. The seventh is regionalization of food diversification strategy. Rice has become the main staple food in Maluku but some regions in Maluku still maintain non-rice staple foods such as corn and sago or combining between sago and tubers and cassava. The policy is to diversify staple foods at each region as an effort to develop a specific society for specific food habits and culture. Investing in food security should be integrated within the poverty alleviation program. The prior investment is not only for food estates but also for the food processing industry at the micro level, particularly for farmer households in rural areas. The main purpose is to 53 increase value added food products and local food competitiveness (Girsang and Papilaya, 2009) as well as to support social movements for poverty reduction, reducing social economic disparity between regions and empowering the poor to help themselves (Sutyastie and Tjiptoherijanto, 2002). It implies that a food estate based upon an integrated region with the food industry in the small islands in Maluku. CONCLUSIONS AND POLICY IMPLICATIONS Food security policy in Maluku province has been based on rice policy in the last decade. This occurred because rice has become the staple food for more than 85% of Maluku people. Local rice production is unable to fulfill rice demand in Maluku that is up to 144,000 tons per year. Therefore, the main policy target was to increase rice production by expanding the area of harvesting and to import rice from outside Maluku. In fact, rice imports are approximately 50% of total rice demand or approximately 70,000 ton per year. The value of rice imports per year is almost the same as the annual budget of the provincial government. Besides the import strategy, the other important policy of food strategy was expansion of wet land rice by substituting sago forest land. This strategy involves a number socio cultural, economic and environmental issues. At the same time intensifying strategy to improve productivity seems difficult to acheive as productivity fluctuates between only 3 and 4 tons per ha. It is recommended that the main priority of food security based on rice is to develop research to find out factors that influence high productivity of wet land rice and upland rice. Then, expansion of new land by substituting sago forest land should be managed carefully in order to avoid cultural, economic and political as well as environmental issues. Importing rice is quite expensive therefore imports can be substituted by increasing the upland rice crop, diversifying staple foods based on regional and cultural food habits and investing in agro- industry for food processing technology in order to develop food security based on flour and carbohydrates. 54 REFERENCES Bappeda Maluku, 2009. Kebijakan Pembangunan Ekonomi Provinsi Maluku. Bappeda Provinsi Maluku. Ambon BPS, 2004. Maluku Dalam Angka 2004. Biro Pusat Statistik dan Badan Perencanaan Pembangunan Daerah Provinsi Maluku. Ambon. BPS, 2005. Maluku Dalam Angka 2005. 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Laporan Penelitian Hibah Bersaing. DP2M Dikti. Jakarta Girsang, W., 2009. Participatory learning in agricultural extension: Constraints, processes and strategies enhancing adoption of fasciolocis control in West Java-Indonesia. Lambert Academic Publising (LAP). Koln. Germany. Girsang, W and E.Ch.Papilaya, 2009. Improvement of sago competitiveness for food security in Maluku, in Lilis N., et al (Editor), Investing in Food Quality, Safety and Nutrition (Proceeding), Southeast Asian Food Science and Technology (SEAFAST) Centre. Bogor Agricultural University. Bogor. Indonesia. Girsang, 2006. Feasibility Study of Sago, Bamboo and Cajuput Oil: A Start-Up Small Scale Business. Report to United Nations Industrial Development Organization. Maluku Technology Centre. Ambon Puspoyo, W., 2006. Perum Bulog Dalam memperkuat Ketahanan Pangan nasional, dalam Jusuf Sutanto dan Tim (Editor), Revitalisasi Pertanian dan Dialog Peradaban. Penerbit Buku Kompas. Jakarta. Sutyastie, S.R., and Tjiptoherijanto, P., 2003. Kemiskinan dan Ketidakmerataan di Indonesia. Rineka Cipta. Jakarta. Solahuddin, S., 2009. Pertanian Harapan Masa Depan bangsa. IPB Press. Bogor. Tambunan, T., 2003. Perkembangan Sektor Pertanian di Indonesia. Ghalia Indonesia. Jakarta. Welirang, F., 2006. Jalan Tengah Sempurna Ketahanan Pangan Indonesia: Tepung Sebagai Solusi Pangan Masa Depan, dalam Jusuf Sutanto dan Tim (Editor), Revitalisasi Pertanian dan Dialog Peradaban. Penerbit Buku Kompas. Jakarta. 55 THE MANAGEMENT OF SUSTAINABLE NATURAL PRODUCTION FORESTS FOR THE MOLCCASN ISLAND GROUPS , INDONESIA. Agustinus Kastanya Pattimura University, Ambon, Indonesia
[email protected] ABSTRACT The Moluccan archipelago, a part of the Indonesian island group, is a very different archipelago from other areas, consisting of more than 1027 small islands and possessing a huge geo-biophysical and socioeconomic diversity. The situation in these islands now, due to the centralistic development regime in place since Indonesian independence, is problematical and threatens the integrity of the archipelago’s ecosystems as well as creating environmental and social disasters for the peoples of this area. The principal problem, caused by lack of synchronicity of sectional development concepts, in particular between the forestry sector and regional development sectors, has led to implementation of policy out-of-step with the ecology, the economy and the socio-cultural needs of the communities in the archipelago. The purpose of this research was to analyse the forest land use, the deforestation process, the potential for maintaining natural production forests and to plan the format of a management group for sustainability of natural production forests (PFMU). The analysis model used Geographic Information System and satellite imaging. The deforestation process was analysed using the multiple regression model. The research determined the importance of two concepts i.e., 1. A macro concept involving the integration of forest development with regional development and 2. A micro concept involving the planning of the format of the PFMU which was one detail of the macro concept. The two concepts are interlinked and form the basis of a sustainable development policy for adoption under regional autonomy. Results show that the FLUCP (Forest Land Use Consensus Plan) policy could not guarantee the sustainability of forests, on the contrary it contributed to the deforestation of forests. The integration processes of forestry development required the establishment of a new forest land use plan (FLUP). Ideally there should be 26 PFMUs of natural forests in the Moluccas. Further study also focused on the functions of the forest leading to formation of Protected Forest Management Units (PrFMU) and Conservation Forest Management Units (CFMU). All of the Forest Units (PFMU, PrFMU and CFMU) will make forest plans to integrate all forest concession areas and to take into account the traditional rights of the people and of the villages within the forest concession areas. An important and strategic factor in the implementation of this concept is having competent human resources. Key words: Sustainable, small island, macro concept, micro concept, deforestation 56 INTRODUCTION The Moluccan (Maluku) archipelago, with approximately 1027 islands, is a very different island group from other areas in Indonesia due to its geo-biophysical, social, economic and cultural diversity. Since Indonesian independence the centralistic development policy has caused many problems in the Maluku region which have threatened the archipelago‘s ecosystem and resulted in environmental and social disasters to communities there. The set of problems faced in sustainable forest management in Maluku are many and are interlinked. When examined at a fundamental level, the major problem concerns the lack of synchronicity between the concepts for sectoral development, in particular the forestry sector, and for regional development. Implementation of the sectoral concept has not been aligned to the ecology, economy and socio-cultural conditions of the communities in the island group. Land area of the Maluku archipelago is 7.9 million hectares, consisting of a forest area of 6.5 million ha and a non-forest area of 1.4 million ha. Deforestation has been happening at a rate which ranges from 2.9 – 3.5 % per year. The lack of balance between the potential of the forest resources and the benefit from the forest can be seen in the number of timber concessions (37) with a total area of 3.4 million ha and wood panel industries (10) with an input capacity of 3.3 million m 3 .whereas production capacity of Rights to a Forest Concession (RFC) is only 1.3 million m 3 or 61% of raw material. Benefits from the forest resources are not in balance with wood production capacity, not to mention results from unrestrained illegal logging and shifting agriculture carried out by local communities each year. This research was organised using ecological, economic and local community socio- cultural based theory integrated into an overall concept which was then further broken down into five fundamental aspects of: forest resources, sustainability of yields, conservation, social economic conditions and institutions. The breakdown of the theory into five areas aimed to lay down a comprehensive foundation for development and provide direction in altering the orientation of the current development. The development concept put forward was aimed at a reformation of forest management in line with the demand for a change in paradigm to a resource ecosystem based management and community-based forest management into one integrated unit as the basis of implementation under regional autonomy. The objective of this research was (1) to analyse the forestry development policy through the conditions of the forest area and the integration to a Provincial Spatial Plan (PSP), the deforestation, the existence of RFC and the potential of stand forest to guarantee sustainability and (2) to formulate a policy for the development of sustainable forests. MATERIALS AND METHODS This research was carried out in the Maluku island group based on 8 clusters groups of islands within the archipelago (see Map 1). The data required was based on the bio- geophysical make-up of the region as well as social, economic and cultural information gathered from the whole of the Maluku islands. The data was collected from field research, interviews, laboratory research, maps, satellite images and statistics. Analysis of forest potential was taken from results of the National Forest Inventory (NFI) using Systematic One Stage Sampling. The analysis model used was the Geographic Information System (GIS) with a combination of different programs incorporating ILWIS, Archviuw and Ermapper. In 57 addition, to analyse the level of deforestation in each island cluster multiple regression was used with the mathematical equation: In (F/L) = a.P/L+b.Y+c.G/P+d.t +e.D1+f.D2+g.D3+h.D4+i.D5+j.D6+k.D7 Key: F/L = Area of deforestation /conversion forest a, b, c, d, e, f, g, h, i, j, k = regression co-efficient P/L = Population density (People/Km 2 ) Y = Agricultural productivity (100 kg/Ha) G/P = Product Domestic Reginal Gross per Capita (Rp / capita) t = Time change D1, D2, D3, D4, D5, D6, D7 = Dummy variable for each island cluster 1, 2, 3, 4, 5, 6, 7 and 8. RESULTS AND DISCUSSION Forestry Development Policy The policy was analysed based on land use planning, forest exploitation by forest concessions and the deforestation process. Can the balance between timber production and benefits from timber be guaranteed while maintaining the ecological and economic balance and guaranteeing the prosperity of the surrounding communities? Allowing RFCs began in 1968 without any regard to land use planning resulting in conflict with communities over land and development projects. Because of the conflicts, the government formulated land use planning based on consensus between stakeholders to steer the development at that time. Land use planning was carried out in accordance with forest functions i.e. protected forest, conservation forest, and areas with other uses. In 1989 a land cover map was made from interpretations of satellite images and in 1996 Spatial Regional Planning was formulated. The results from overlapping the three maps from the three different years showed quite marked changes in vegetation, or occurrence of deforestation, so adaptation and change in land use planning was needed to reach consensus about permanent land use. Based on the overlapping results permanent land use appropriate to the various functions of forests was decided in 2000 as shown in Chart 1. The decisions about forest use were a result of integration with the Provincial Spatial Plan and evaluation of the vegetational changes up to 2000 which showed the area still covered by forest to be 6,513,024 ha (82.77%) while the non-forest area was 1,355,403 ha (17.23%). The total forest region of 7,219,047 (91.75%) consisted of forest cover of 6,112,711 ha (77.69%) and non-forest cover of 1,106,336 ha (14.06%) whereas the Other Land Use area of 649,380 ha (8.12%) consisted of a forest area of 400,313 ha (5.09%) and a non-forest area of 249,067 ha (3.17%). Overall, the changes to permanent land use (PLU) saw an increase of 60.10% in permanent forest areas (PrF, CF, PF, LPF) which included protected forest (PrF, CF) increased by 24.49% and permanent production forest (PF, LPF) by 35.61%. While Production Forest Conversion area (PFC) increased by 31.64%, the PFC could only be converted if there was a strong need, so that eventually it would become permanent production forest. Since Right to a Forest Concession (RFC) were granted in Maluku, beginning in 1966, there have been 37 such concessions allowed. The spread of RFC over 6 of the island clusters is not even in respect to the number and the area of each one. In island 58 cluster 1 there are 16 RFC with an area of 1,491,900 ha; island cluster 2 has 4 RFC covering an area of 402,400 ha; island cluster 3 has 14 RFC with an area of 1,225,400 ha; cluster group 5 has 1 RFC with an area of 100,200 ha; in group 6 there is 1 RFC with an area of 162,800 ha and cluster group 8 has 1 RFC covering an area of 50,000 ha (not mapped as yet). Analysis results showed that a large number of the forest concessions were located not only in Production Forest areas (PF, LPF, PFC) but were also found in Protected Forests (PrF) and Conservation Forests (CF). Due to the management of the RFC, the changes in forest vegetation and land cover from year-to-year has resulted in non-productive non-forested land consisting of non- productive dry land (Npdl), non-productive wet land (Npwl), farmland (Al), plantation land (Pl) and land for other uses (OLU). Analysis results showed that changes in forest land across the RFC were quite large, 316,800 ha overall, consisting of Npdl of 191,900 ha, Npwl of 3,500 ha and farmland, plantation and other uses of 121,400 ha. Non-productive dry land area was quite large indicating that forest management by the RFC was very weak and unable to satisfy the principles of forests sustainability. 59 FIGURE 1. FOREST LAND USE PLAN (FLUP) IN EACH ISLAND CLUSTER IN MALUKU 60 0 1,000,000 2,000,000 3,000,000 PrF CF PF LPH PFC OLU FLUP 1,482,00 445,229 1,202,20 1,599,77 2,489,83 547,028 Forest 1,294,89 413,225 987,212 1,532,04 1,885,33 323,835 Non Forest 187,113 32,004 214,994 67,730 604,495 223,193 Maluku Ha 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 PrF CF PF LPH PFC OLU FLUP 11,480 0 31,836 0 48,980 0 Forest 4 0 25,656 0 15,520 0 Non Forest 11,476 0 6,180 0 33,460 0 Group 7 Ha 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 PrF CF PF LPH PFC OLU FLUP 15,132 58,580 182,316 2,544 553,392 0 Forest 10,300 57,508 165,276 2,544 480,684 0 Non Forest 4,832 1,072 17,040 0 72,708 0 Group 5 Ha 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 PrF CF PF LPH PFC OLU FLUP 28,844 46,150 45,525 3,850 238,200 12,775 Forest 6,004 33,200 26,850 0 83,500 3,250 Non Forest 22,840 12,950 18,675 3,850 154,700 9,525 Group 8 Ha 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 PrF CF PF LPH PFC OLU FLUP 558,200 194,700 375,500 838,900 610,100 132,700 Forest 513,500 187,100 242,900 790,700 454,800 84,600 Non Forest 44,700 7,600 132,600 48,200 155,300 48,100 Group 3 Ha 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 PrF CF PF LPH PFC OLU FLUP 20,488 76,648 125,048 83,472 139,604 4,088 Forest 12,228 73,504 105,240 81,128 116,464 4,088 Non Forest 8,260 3,144 19,808 2,344 23,140 0 Group 6 Ha 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 PrF CF PF LPH PFC OLU FLUP 773,350 40,150 238,800 633,225 734,275 290,775 Forest 702,400 36,000 228,700 621,050 602,300 195,350 Non Forest 70,950 4,150 10,100 12,175 131,975 95,425 Group 1 Ha 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 PrF CF PF LPH PFC OLU FLUP 31,184 15,332 7,856 2,732 29,304 50,940 Forest 9,304 14,544 4,640 2,596 17,792 6,772 Non Forest 21,880 788 3,216 136 11,512 44,168 Group 4 Ha 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 PrF CF PF LPH PFC OLU FLUP 43,300 11,575 195,325 37,600 135,975 55,750 Forest 41,150 8,825 187,950 36,575 114,275 29,775 Non Forest 2,150 2,750 7,375 1,025 21,700 25,975 Group 2 Ha 61 Decisions taken by the RFC are not in accord with forest functions, apart from areas which must be protected by the RFC, have already led to changes as evidenced by an increase in non- productive wet land to 3,500 ha. These areas include special habitats such as swamp forests with 23,700 ha and mangrove forests of 18,400 ha. In addition community socioeconomic activities such as agricultural land, plantations and other uses have taken place within the RFC covering an area of 121,400 ha. Thus the potential of the forest which can still be effectively counted within the RFC has an area of 3,005,300 ha. Furthermore, RFC areas are not compact, are spread across small islands with small areas and poor supervision which explains why forest sustainability in Maluku is far from what was expected, especially sustainability of ecosystems and forest resources which are fundamental concepts of today’s forest management. Thus, basic changes are needed in management systems for Production Forests in Maluku. At the moment most RFC are no longer operational, the owners have just left them in that state without taking any responsibility. All forest types in the 8 cluster groups have non-forest areas or have suffered quite large areas of deforestation. Deforestation has occurred ceaselessly since the decisions taken in 1996. Up to the present in time the Forest Land Use Plan (FLUP) has been in operation for 12 years and the rate of deforestation is 2.9 – 3.5% on average so there have already been big changes in the application of FLUP. Recently as part of the aftermath of conflict and the non-restraint of development policies, the 37 timber industries which have been operating since the beginning are no longer viable because of the decrease in timber potential or the heavy damage to the forests. Government policy has also largely contributed to the deforestation process because of overlapping sectoral development. Deforestation was also analysed using the double regression model with three independent variables with a tangible impact i.e. population density (P/L), food productivity from agriculture (Y) and another variable/time (t), whereas the variable for income level did not have a significant influence. The tangible difference over the island clusters is given by D except for cluster group 5 compared to group 8. Analysis results gave the regression equation as: In (F/L) = - 0,838 P/L + 1,265 Y - 0,028 t + 1,160 D1 + 1,043 D2 + 1,176 D3 + 1,427 D4 + 0,134 D5 + 0,858 D6 + 0,614 D7 The population density variable (P/L) had a negative relationship to the forest proportion. This means that each increase in population density of 1 person/km2 had a large impact on reduction of forest cover. Food productivity (Y) variable had a positive relationship which means that each 1 Kw of food produced per hectare would reduce deforestation quite markedly and the time variable (t) is influenced by other factors and not by population density or food production. The time variable had a negative effect showing that time change resulted in a decrease in forest proportion i.e. deforestation. 62 FIGURE 2. REMAINS OF FOREST AREA EACH 10 YEARS IN LINE WITH 3 SCENARIOS IN MALUKU The time variable is a flow on from many factors causing changes in forest proportions. The influencing factors causing changes in forest proportions can only be determined overall not in detail. Some of the factors include government programs for land use such as new roads, building offices, housing, trans-migration. In addition there is unauthorised tree felling, which is widely discussed. Projected results for 3 development scenarios over 70 years where deforestation takes place each year so the remaining forest cover decreases continuously are shown in Figure 2. Right up until 2007 all timber concessions and the 10 wood panel industries had ceased operations because there was not enough timber. The deforestation process, therefore, probably increased after regional autonomy because of forest development policies in each region aimed at increasing regional income and saw available forest resources given to businesses or permission for timber granted without clear concepts in place. Production forest stand potential Results of analysis of the average potential of forest stands over the entire natural forest, for all forest strata, showed a difference in both the number of trees per hectare and the volume per hectare for all tree types including commercial types. The most striking difference was between the stand potential of natural forest which had not been felled and that which had been cut. The entire area of production forest (PF, LPF, PFC) which had not been cut by 1996 was approximately 45% or 2.68 million ha. Potential of the forests which had been cut was 50% less than in those which had never been cut. The number of all types of trees in non-felled forests had a maximum of 144.7 N/Ha in Production Forests and a minimum of 134.6 N/Ha in Limited Production Forests. In areas which had already been cut 63 the highest number of trees was 67.4 N/Ha and the lowest 50.8 N/Ha in Production Forest Conversion. The areas which had been felled and left by the RFC showed a high level of uncontrolled damage. In particular this was seen in the commercial species in former felled areas where the highest number of trees was 19.1 N/Ha in Limited Production Forests and the lowest 15.5 N/Ha in Production Forest Conversion. Differences between the number of trees per hectare and the average volume per type compared with the number and average volumes of the comercial type was markedly high giving an indication that there are still many tree types which are not well utilised. Furthermore RFCs are inclined to use species with high economic value and to ignore those with a low economic value. This has often led RFC to fell trees outside of the regulations and has resulted in further forest destruction and felled waste. The research results concluded that the conversion factor from timber felled in the forest to the road edge was 50%. The actual condition of the forest which had not been felled, otherwise called primary forest, and the forest which had already been felled indicated that already felled forests had suffered great damage. An illustration of this is that the number of commercial trees (diameter 20 cm up) which far exceed the regulations determined by Indonesian Selection Cutting and Replanting System (ISCRS) was 25 trees per ha while in the forests which had already been cut the trees were much smaller. This fact clearly indicated that forest management by the RFC had threatened the sustainability of the forests – the fundamental law of forestry development. The same thing could be seen in the number of trees and the average volume of mature felled trees. The composition and size of young trees (seedlings, saplings and stakes) and young trees (diameter 20 – 49.9 cm) gave an indication for estimating the amount of regeneration in a stand. Based on composition and size of the regeneration, silviculture activities could be planned to produce trees which will result in stands capable of achieving sustainability of the forest. Analysis results showed that the number of seedling and young trees were consistently higher in forests which had not been felled, which again illustrated that damage occured in areas where there was felling. The highest amount of regeneration was in Limited Production Forests and Production Forests in lowland forest vegetation areas. The amount of regeneration and spread of undergrowth depended on the species group and a picture of average volume per hectare can be seen in the levels of young plants (seedlings, saplings) able to guarantee continuing growth. The highest number of seedlings and young trees was in the LPF and the PF while the lowest was in the PFC. The tallest poles were in the PF and the PFC with the lowest in the LPF. Almost the same trend was found for the commercial woods. Repairing the forest management system must be based on actual conditions, i.e. in the remaining forest which has not been cut proper application of the ISCRS and attention to the conditions in the forests which have been cut must be adhered to. Also, detailed inventories and fundamental research in developing technologies capable of restoring the conditions needed for management of sustainable forests as already determined by Management of Forest Production Unit (FPMU), must be carried out. Development Policy for Sustainable Forests Basic Concept of Sustainable Forestry This research resulted in two important concepts i.e. (1) integration of forestry development with regional development, called the macro concept and (2) a program to form the FPMU or the micro concept, which is a clarification of the macro concept. Thus the two 64 concepts are interlinked and integrated as the basic concept for change in development paradigms leading to sustainable development. This concept forms the basis of sustainable forest management to fulfill the regional autonomy concept in the Maluku archipelago. Regional autonomy began in January 2001 and has undergone many changes from that time until the present, especially in growth of the region and the towns. An explanation of the concept of sustainability can be seen in Figure 3. All development sectors need to clarify the macro concept in micro concept plans based on principles of sustainable forest management. Micro plans in all sectors linked to land must be integrated into one watershed unit which must guarantee sustainability of the environment as well as community prosperity. Sustainability of the island clusters and of the Maluku archipelago overall is the most important factor. In order for a guarantee of sustainability there needs to be a striving for unification of the government administrative region with the ecological watershed and the cluster island group. It must be noted that from an ecological standpoint relationships between island clusters cannot be separated which means that at regional level autonomy should not then ignore the relationships between island clusters. Thus, for sustainability of the Maluku archipelago region, autonomy would be better at province level. Breaking down of the macro concept into a micro concept for all sectors guarantees the harmonious use of space without the conflicts over importance which have occurred up to recent times. The whole community can be certain of the efforts being made to increase prosperity and sustainability of the environment. For the forestry and agriculture sectors overall they need to become PFMU, PrFMU, CFMU and Agroforestry/Farm Forestry for all regions in the archipelago in line with the Land Use Plan (LUP). Model 26 of PFMU in 6 island groups is a model which will be developed more widely. Every Management Unit (MU) will follow up with working plans and each working plan must be able to integrate the communities‘ traditional rights as well as the villages‘ rights which are protected in the MU sphere of action. Every MU area must be arranged into compartments and sub-compartments with more uniform and permanent biogeophysical characteristics to become one management treatment unit and a data base for the MU. All data bases in the MU should be organised using GIS and constantly updated with the latest satellite images and also through field surveys and inventories. An important and strategic factor in supporting the application of the outcomes of these concepts is the need to improve the quality of human resources especially through developing vocational education at SMK and community colleges – education based around the natural resources in each island cluster. FIGURE 3. DIAGRAM OF THE CONCEPT OF SUSTAINABLE FORESTS 65 Formation of a Production Forest Management Unit (PFMU) Based on the sustainability concept outlined above there needs to be a PFMU formed in all available production forest areas. To guarantee sustainability of the ecology and economy, the PFMU unit must look after a minimum area of 100,000 ha. Analysis results showed that currently not all management units cover that minimum area. On the other hand, in the PFMU‘s which do have 100,000 ha or more, after correction to the environment was Conceptual Framework Ecology Economy Social Forest resources Production sustainability Conservation Social economy Institutions Integration Macro Concept Provincial Spatial Plan (PSP) Watershed Forest Land Use by Consensus (FLUPC) Forest Land Use Plan in each Watershed Natural Production Forest and Agroforestry Management Unit Production Forest (PF) Other Land Use (OLU) Protection Forest (PrF) Conservation Forest (CF) Management Units in Watershed Protection Forest Management Unit Conservation Forest Management Unit Farm Forestry/Agroforestry Micro Concept 66 carried out, it seems that the area which can be used is not sufficient or, in other words, the area which must be protected by the PFMU is quite large and must be given special attention. Plans for the PFMU areas which are less than the recommended minimum which are found in watersheds on single islands will not be allowed to become a sub PFMU under the PFMU on another island. There needs to be a special examination to determine the status of that particular PFMU. However areas of PFMU which are almost at the minimum can be joined with one or more of the nearest sub PFMU‘S as long as that PFMU can guarantee sustainability. The distribution of PFMUs in Maluku is shown in Figure 4. The PFMUs which need to undergo special examination are PFMU 1, and PFMU X in island group 1; PFMU III island group 2; PFMU 1 island group 8. These PFMU must be specifically examined because they do not cover the minimum area required, each is found on individual islands and are not allowed to become a sub PFMU under a PFMU on another island. This special investigation is intended to provide a picture as to the economic viability of the stand potential and its ability to guarantee the sustainability. PFMUs to be considered for amalgamation with the nearest one, due to coverage areas less than the minimum, are PFMU VII (Lamo-Pintatu) to join with Sub-PFMU I (Barasei-Pintatu) and Sub-PFMU II (Barasei) in island group 1; PFMU I (Taliabu) join with Sub-PFMU I (Taliabu) in island group 2; PFMU IV (Kawa-Natu) join with Sub-PFMU I (Kawa) on island group 3. The remaining PFMUs in each island cluster to remain as independent entities. Island group 1 would have 9 independent PFMUs; group 2 would have 2 independent PFMUs; in group 3 there would be 6 independent units, group 5 one independent unit amd group 6 also one independent unit. FIGURE 4. DISTRIBUTION OF PFMUS IN MALUKU 67 Allocation of production forest area for PFMU-IFP (Production Forest Management Unit-Industrial Forest Plantation) and PFMU natural forest or PFMU-ISCRS (Indonesian selection cutting and replanting system) covers an overall area of 3,765,124 ha. For island cluster 1 1,655,532 ha would be divided between 10 PFMU, two sub-PFMU and one PFMU- IFP. Island cluster 2 would have 246,184 ha for two PFMU, one sub-PFMU and three PFMU-IFP. For island group 3 there would be 1,441,485 ha for seven PFMU, one sub- PFMU and one PFMU-IFP. In island group 5 an area of 143,842 ha would be covered by one PFMU and in island group 6 there would be 93,159 ha for one PFMU. In each area covered by a PFMU not all of the land can be used – part of it must be protected in an effort to correct environmental factors, to protect land or specific habitats sensitive to environmental changes. From the entire area covered by PFMUs the amount that must be protected is 899,782 ha or 23.9%. This means that only 2,865,337 ha or 76,1% in all PFMU areas can be used. After environmental correction factors the next step is identifying social cultural factors and any corrections to be made. In identification of such factors, population and community aspects are very important. Identification of community socio-cultural factors, in terms of determining the PFMU, must be done in detail to rediscover the value of the traditions of the local community, including institutions which had been in existence and those new ones which are still relevant in promoting the role of the local community. The villages around and inside the PFMU areas form the basis of community life and in specific catchment areas traditional values have been identified and community participation encouraged democratically in determining the traditional and individual limits of the region belonging to the village, then continuing with involvement in the planning, decision making, management and supervision processes. All PFMUs and PFMU-IFP in each watershed and island cluster are the smallest management unit representing one ecosystem within the watershed, island or cluster group ecosystem and each must identify its components in detail. In macro terms all ecosystems covered by PFMU have been identified in terms of the region’s physical condition concerning the land system, vegetation, bio-diversity, deforestation process, area already felled and that not yet cut, production and regeneration potential, river crossings, socio- economic conditions and local culture. CONCLUSIONS Forestry development policy, until the present time, has not guaranteed sustainability of the forests in the Maluku Archipelago. The evidence is seen in the ineffective Forest Land Use Plan , 37 RFC with a land allocation of 3,382,600 ha, regulations and management which did not fulfill sustainability fundamentals and the cessation in operation of the RFC because of the decline in forest potential and conflict with communities. There has been rapid deforestation of 2.9 – 3.5% per annum. Results from development scenarios showed that the forest would be gone in a very short time. Because of all of these factors, all stakeholders, governments, universities, world research organizations, NGO’s both national and international must be made aware and must speak out against all policy which leads to forest destruction especially in small islands due to its direct impact on destruction of ocean ecosystems. Ecosystems on small islands with their forests are the lungs of the world in the fight against global warming. Policy to apply the Sustainable Development concept is still facing a long struggle. The Macro-Micro concept is the basics for application in Maluku and North Maluku and even in the 68 rest of Indonesia. Regional autonomy should have made everything possible in accordance with local conditions however implementation is still difficult. Application of the new LUP with production forest (PF, LPF, PFC) area of 5.9 million with all its biodiversity; forest which must be protected (PrF, CF) of 1.9 million ha and Other Use Area must be developed into PFMU, PrFMU, CFMU and Agroforestry/Farm Forestry which can realize the very great forest potential at the same time guaranteeing livelihoods for generations to come and reducing the bad effects of global warming. There needs to be movement by the forestry community and lovers of the environment to push for development of the concept. The structure of Natural Production Forests integrated with watersheds in each island cluster with the formation of 26 PFMU in six island clusters and five PFMU-IFP, allocation of forest production area of 3.8 million ha (but only 2.9 million or 76.1% which can be exploited) is imperative. The remaining land area of 0.9 million ha (23.9%) must be protected. Intensive cooperation is needed for implementation of the concept and it must be measured by the central government, the regional government, universities, NGO’s and other stakeholders. Due to the unrestrained destruction of forests up to the present, caused by regional government allowing unregulated timber concessions, illegal logging, shifting cultivation and burning of forests, the world community must react and support implementation of the sustainable development concept. Acknowledgements In the research and writing of this paper assistance was received from many sources both directly and indirectly and the writer wishes to express thanks for such help. In particular the writer acknowledges the help from Jajaran Forestry Department, Jakarta and Maluku Province Forestry especially Ir. Josep Siahaya (dec) and Mr D. Taihitu who facilitated collection of data and use of facilities. Thank you to the Governor of Maluku and staff of Maluku Regional Government, especially the Regional Planning Body which assisted in gathering of data and use of facilities. Thank you also to the Rector, Pattimura University, and the Dean, Agriculture Faculty, as well as lecturers who gave help, support and facilities. Valuable assistance in the form of advice, discussion and editing as well as support in completing the research and writing the paper was given by Prof. Dr. Ir. Achmat Soemitro, MSc and Prof. Dr. Ir. J.L. Nanere, MSc. Invaluable help came from Ir. Arifin and Mein Kastanya in organising data, typing and correction and the writer expresses his great thanks to them. To Donna Harper for translating and correcting the writer expresses gratitude. To all others whose names are not mentioned but whose sacrifices are valued, the write also expresses his gratitude. It is hoped this paper will be effective for the prosperity of communities and the sustainability of the environment, especially in the small island region of Maluku and North Maluku, Indonesia. 69 REFERENCES Dasman, R.F., Milton, J.P. and P.H. Freeman. 1973. Ecological Principal for Economic Development. John Wiley and Sons Ltd. London. Departemen Kehutanan. 1992. Manual Kehutanan. Departemen Kehutanan, Jakarta. DFID. 1999. Final Report of the Senior Management Advisory Team and the Provincial Level Forest Management Project. Volume 1, 2. Indonesia Towards Sustainable Forest Management. FKKM. 1998. Sumbangan Pemikiran Tentang Reformasi Pengelolaan Sumberdaya Hutan Nasional. 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[email protected] ABSTRACT Women manufacturing ―sagu lempeng‖ (sago biscuit), are an important stakeholder in agribusiness of sago. However, their businesses are still struggling because of lack of technology, innovation as well as capital and marketing planning. The main purpose of this research is to investigate the income level of women workers of sago biscuits and its contribution to the household income, and to determine factors influencing the level of their incomes. The findings suggest that the average income of a woman worker of sago biscuit is Rp 1.062.707 per month, with the value of benefit-cost ratio (BCR) of 2.2. The contribution of sago biscuit income to the level of total income is almost 75 percent, which clearly implies the importance of this sago biscuit business. Price is also a significant factor in this business. Keywords: Sago biscuit , income analysis, agribusiness INTRODUCTION According to the National Development Plan 2004-2009, President regulation No. 7, 2005, the purpose of agriculture development in Indonesia is to achieve a strong agriculture system which will contribute to food security, increased added value and product competitiveness as well as increased farmers‘ wealth. This is in line with the mission of national development, which is to achieve prosperity for many Indonesians. The policy priority is directed at resolving poverty, food security, and increased product competitiveness and added value through improved quality. One of the products from Maluku province, potential to support food security, reduce poverty and preserve local wisdom is sago palm (Papilaya, 2006). On the other hand, there are some issues and challenges in sago development in Maluku, such as: (1) insufficient information regarding the areas of sago palm, (2) sago areas conversion into other agricultural activities, (3) lack of public understanding about the sago multifunction, (4) traditional technology, (5) lack of government investment in sago production, (6) a continuing shift of public consumption habit from sago to rice, and (7) no local policy available to sustain local sago palm (Papilaya dan Alfons, 2005). One of the important stakeholders in sago post harvest is women sago workers. Some of the problems faced include: limited technology, assets, production inputs and marketing strategy (Papilaya, 2005). These problems influence their incomes. 71 Hernanto (1995) suggested that income or profit is the difference between return and cost. There are several measurements for income, such as: 1. Farmer working income, based on return from sales 2. Farmer working revenue, obtained from farmer working income plus other revenues 3. Family working income, obtained from farmer revenues plus family labour The purpose of this research is twofold, firstly, to analyze the level of income of women sago workers; secondly to analyze the cost-benefit ratio of the contribution of women sago workers towards family income, and finally to analyze factors influencing the level of income of women sago workers METHODOLOGY A simple random sample was used in collecting the data. Descriptive statistics analysis was then used to explain the data. TABLE 1. DISTRIBUTION OF RESEARCH LOCATIONS District/City Sub-District Village Number of women sago worker Number of respondents Maluku Tengah Salahutu Waai Tulehu Suli 6 8 4 4 6 1 Kota Ambon Teluk Ambon Baguala Wailiha Lateri Galala 4 5 3 1 4 3 Nusaniwe Amahusu Latuhalat 3 4 1 4 Total 3 8 37 24 To address the first objective, the following equation was used: Y = TR – TC Where, Y = income TR = total revenue TC = total cost BCRi = Bi/Ci Where : BCR = Benefit Cost Ratio of women sago workers Bi = Net revenue of women sago workers (Rp) 72 Ci = Production costs (Rp) To answer the second objective, the following formula was used: Contribution = a/b x 100% Where : a = Income of women sago workers b = Family income For objective number three, multiple linear regression was used as follows: Y = b 1 x 1 + b 2 x 2 + b 3 x 3 + ……….+ b 6 x 6 + e Where: Y = The level of income of women sago workers b 1 b 2 b 3 …b 6 = Standardised regression coefficients X 1 = Age X 2 = Level of formal education X 3 = Working experience X 4 = Family dependants X 5 = Total production X 6 = Price e = Error FINDINGS AND DISCUSSIONS Respondents characteristics Age Generally the ages are divided into two categories, productive age from 15 to 64 years, and non-productive age more than 64 years (Table 2). TABLE 2. RESPONDENTS DISTRIBUTION BY AGE CATEGORY Category Number Percentage Productive (15-64 years) Non productive (More than 64 years) 19 5 79,2 20,8 Total 24 100 Minimum age 30 years Maximum age 77 years 73 Tabel 2 shows that the majority of respondents were in the productive age group with the minimum age of 30 years (79.2%). Non productive age was 20.8% with the maximum age of 77 years. In general, Level of education Education is quite important in doing business. Traditional business is a simple task and does not require a university degree. However, it requires the love of doing business (Prabowo, 1991). Women sago workers have different levels of education. TABLE 3. RESPONDENTS DISTRIBUTION ACCORDING TO THE LEVEL OF EDUCATION Category Number Percentage Primary Junior high Senior high 21 2 1 87.5 8.3 4.2 Total 24 100 Lowest education Primary Highest education Senior high Average Primary Table 3 shows that the lowest education level of primary school is 87.5%, and the highest (senior high) is 4.2%. It is observed that different levels of educations do not really influence the income because in general women sago workers tend to use their experience in running their business. Business experience There are two different categories in running the sago business. The first category is women sago workers with less than 5 years experience while the second is those with more than 5 years experience. TABLE 4. RESPONDENTS DISTRIBUTION ACCORDING TO BUSINESS EXPERIENCE Category Number Percentage Less experience (under 5 years) Experience (above 5 years) 3 21 12.5 87.5 Total 24 100 Minimun experience (2 years) Maximum experience (60 years) 74 Average (31 years) Table 4 shows that 12.5% respondents have less experience (under 5 years and the rest have more experience (above 5 years). Average business experience is 31 years. Business experience is one of the important factors in developing human resources. Not only increased knowledge is required but also working skills to increase productivity (Simanjuntak, 2001). Number of family dependants Number of dependants is grouped into two categories, less than three people, and greater than three people. TABLE 5. RESPONDENTS DISTRIBUTION ACCORDING TO NUMBER OF FAMILY DEPENDANTS Category Number Percentage Little (Less than three) A lot (More than three) 3 21 12.5 87.5 Total 24 100 Minimum dependant (1 person) Maximum dependant (10 persons) Average ( 5 persons) Table 5 shows that the number of dependants with a minimum 1 person is 12.5%, while with the maximum of 10 persons is 87.5%. The average number of dependants is five persons. The number of dependants is positively correlated to the costs required to fulfill family needs daily. Production Production is the revenue obtained from the business. There are two categories. The first category is a limited category (less than 1,500 porna per month), and the second is the abundant category (more than 1,500 porna per month). One porna consists of 6 pieces of sago. TABLE 6. RESPONDENTS DISTRIBUTION ACCORDING TO PRODUCTION 75 Category Number Percentage Little (Less than 1,500 porna) Abundant (More than 1,500 porna) 19 5 79,16 20,84 Total 24 100 Minimum production ( 200 porna) Maximum production (2.400 porna) Average ( 1.300 porna) Table 6 shows that almost 80 of the respondents produce less than 1,500 porna, with the minimum production of 200 porna per month, while the rest produce more than 1,500 porna per month with the maximum production of 2,400 porna per month. Average production per month is 1,300 porna. Sales price There are two categories of sales price, less than Rp 2,000 and greater than Rp 2,000. TABLE 7. RESPONDENTS DISTRIBUTION ACCORDING TO SALES PRICE Category Number Percentage Low (Less than Rp 2,000) Tinggi (Greater than Rp 2,000) 5 19 20.84 79.16 Total 24 100 Tingkat harga jual minimum ( Rp.1.000,-) Tingkat harga jual maksimum ( Rp.3.000,-) Rata-rata ( Rp.2.000,-) The above table indicates that almost 80% of respondents sell their sago biscuits at the high price, greater than Rp 2,000 with the maximum price Rp 3,000, while 20% sell at the low price, less than Rp 2,000 with the mimimum price of Rp 1,000. The level of income and Cost Benefit ratio Women sago workers have different sources of income and expenditures. Their income can be grouped based on the level of poverty according to BPS. 76 TABLE 8. RESPONDENTS DISTRIBUTION ACCORDING TO MONTHLY INCOME LEVEL Variable Category Sago biscuit Sagu Gula Sagu Tumbu Number % Number % Number) % Income level Very poor (less than Rp 480,000) Poor (Rp.480,000- Rp 700,000) Close to poor (More than Rp 700,000) 15 - 9 66.70 - 33.30 24 - - 100 - - 23 - 1 95.83 - 4.2 Minimum income Maximum income Average Rp 30,670 Rp 6,119,346 Rp 1,062,707 Rp 8,500 Rp 68,000 Rp 23,833 Rp 67,000 Rp 759,500 Rp 430,500 According to Table 8, there are three different categories of income level. 66.7% respondents dominate the very poor category with a minimum income of Rp 30,670, less than Rp 480,000. 33.3% respondents are close-to-poor category with the maximum income of Rp. 6,119,346 more than Rp 700,000, with an average income of Rp 1,062,707. TABLE 9. AVERAGE NET INCOME AND COSTS OF PRODUCTION Average Net income Production cost Sago biscuit Rp. 1,062,707 Rp. 469,397 Total BCR Rp. 1,062,707 2.2 Rp. 469,397 Benefit Cost Ratio (BCR) is calculated by dividing net income over production cost, which gives a BCR of 2.2, meaning that every unit of investment will give an output of 2.2 unit. This also implies that the sago biscuit business is beneficial and worth pursuing and developing. Contribution of sago income to family income Table 10 indicates that minimum and maximum income of respondents is Rp 248.061 and Rp. 7.384.173 per month respectively, with an average income of Rp 1.646.444. Total family income ranges from Rp. 448.061 to Rp. 8.684.173 with an average income of Rp 2.224.811 per month. 77 TABLE 10. TINGKAT KONTRIBUSI PENDAPATAN PEREMPUAN PENGUSAHA SAGU LEMPENG TERHADAP PENDAPATAN RUMAHTANGGA Pendapatan (Rp) Per bulan Perempuan pengusaha sagu Non perempuan pengusaha sagu Rumahtangga Presentase terhadap pendapatan rumahtangga Minimum Maksimum 248.061 7.384.173 200.0000 1.300.000 448.061 8.648.173 55,36 85,03 Rata-rata 1.646.444 555.708 2.224.811 74,70 The contribution of sago income is 74.7% implying that sago business significantly contributes to the family income. Factors influencing income level Statistical analysis The regression results are as follows: Y = 0,258X 1 + 0,093X 2 – 0,134X 3 + 0,387X 4 + 0,111X 5 + 0,625X 6 R 2 = 0,488 The results show that only variable X4 and X6 are statistically significant. CONCLUSIONS 1. Average income of women sago workers is Rp 1.062.707. Minimum income is Rp. 30.670 while maximum Rp. 6.119.346. The Benefit cost ratio is 2.2. 2. Contribution of sago income toward family income is 74.70% indicating a relatively high contribution of sago business. 3. Only two variables, number of dependants and sale price significantly and positively influence the income. RECOMMENDATIONS 1. It is suggested that the local government and other related stakeholders develop the sago industry in the near future. This is based on the economic rationale and other benefits sago industry would derive. 2. Due to a relatively high contribution of sago income towards family income, it is advised that women sago workers should be empowered in several aspects such as technology, innovation and marketing strategy. 78 3. Because the sales price is a significant variable in determining the income, price must be treated with caution if we are to empower women sago workers and their business. 79 REFERENCES Ackley, 1992. Pengantar Ekonomi Pertanian. LPPES, Jakarta. Ahmad, 1996. Akuntansi Manajemen. PT Raja Grafindo Persada Jakarta. 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Prinsip Dasar Ekonomi Pertanian Teori dan Aplikasi, Penerbit PT Raja Grafindo Persada, Jakarta. 81 RATA - RATA PENERIMAAN DAN PENDAPATAN PEREMPUAN PENGUSAHA SAGU LEMPENG MASING-MASING RESPONDEN No Responden Jumlah Produksi Harga Jual Total Penerimaan Biaya Produksi Pendapatan Bersih (Porna/Bulan) (Rp/Bulan) (Rp/Bulan) (Rp/Bulan) (Rp/Bulan) 1 1.200 2.500 1.948.735 1.051.265 897.470 2 800 2.000 924.670 675.330 249.340 3 900 2.500 1.260.875 989.125 271.750 4 1.200 2.500 2.525.417 474.583 2.050.834 5 400 2.000 487.500 312.500 175.000 6 600 1.500 545.813 354.187 191.626 7 2.400 2.000 4.197.248 602.752 3.594.496 8 260 2.000 275.335 244.665 30.670 9 798 2.000 1.369.003 166.997 1.202.006 10 300 2.000 362.672 237.328 125.344 11 960 2.500 1.715.418 684.583 1.030.835 12 2.400 3.000 6.659.673 540.327 6.119.346 13 500 1.500 485.517 264.483 221.034 14 2.000 1.000 1.091.803 908.197 183.606 15 1.600 2.500 3.471.687 528.313 2.943.374 16 2.000 1.500 2.735.517 264.483 2.471.034 17 200 2.000 221.561 178.439 43.122 18 500 2.000 621.228 378.772 242.456 19 300 2.000 403.149 196.851 206.298 20 1.800 2.000 3.170.436 429.564 2.740.872 21 240 2.000 266.988 213.012 53.976 22 600 2.000 690.000 510.000 180.000 23 600 2.000 673.900 526.100 147.800 24 800 1.500 666.331 533.669 132.662 TOTAL 23.358 48.500 36.770.476 11.265.525 25.504.951 RATA- RATA 973 2.021 1.532.103 469.397 1.062.707 82 RATA - RATA PENERIMAAN DAN PENDAPATAN PEREMPUAN PENGUSAHA SAGU TUMBU MASING-MASING RESPONDEN No Responden Jumlah Produksi Harga Jual Total Penerimaan Biaya Produksi Pendapatan Bersih (Porna/Bulan) (Rp/Bulan) (Rp/Bulan) (Rp/Bulan) (Rp/Bulan) 1 1.000 1.000 773.250 226.750 546.500 2 3 900 1.000 829.750 70.250 759.500 4 5 100 1.000 133.500 66.500 67.000 6 7 8 9 10 11 12 1.000 1.000 674.500 325.500 349.000 13 14 15 16 17 18 19 20 21 22 23 24 TOTAL 3.000 4.000 2.411.000 689.000 1.722.000 RATA- RATA 750 1.000 602.750 172.250 430.500 83 RATA - RATA PENERIMAAN DAN PENDAPATAN PEREMPUAN PENGUSAHA SAGU GULA MASING-MASING RESPONDEN No Responden Jumlah Produksi Harga Jual Total Penerimaan Biaya Produksi Pendapatan Bersih (Porna/Bulan) (Rp/Bulan) (Rp/Bulan) (Rp/Bulan) (Rp/Bulan) 1 2 50 1.500 63.000 12.000 51.000 3 20 5.000 76.000 21.000 55.000 4 5 6 7 20 2.500 38.000 12.000 26.000 8 25 2.500 40.500 22.000 18.500 9 15 2.500 26.500 11.000 15.500 10 20 2.500 30.000 20.000 10.000 11 35 2.500 54.500 33.000 21.500 12 30 2.500 50.000 25.000 25.000 13 25 2.500 35.500 27.000 8.500 14 30 2.500 46.500 28.000 18.500 15 30 2.500 54.000 21.000 33.000 16 25 2.500 35.500 27.000 8.500 17 15 2.500 26.500 11.000 15.500 18 30 3.000 79.000 11.000 68.000 19 20 25 2.500 35.500 27.000 8.500 21 22 30 3.000 54.000 36.000 18.000 23 30 3.000 54.000 36.000 18.000 24 20 2.500 30.000 20.000 10.000 TOTAL 475 48.000 829.000 400.000 429.000 RATA- RATA 26 2.667 46.056 22.222 23.833 84 Rata-rata Biaya Produksi Perempuan Pengusaha Sagu Biaya Produksi Biaya Produksi Biaya Produksi Sagu Total Biaya Produksi Lempeng (Rp) Sagu Gula (Rp) Tumbu (Rp) (Rp) 469,397 22,222 172,250 663,869 Rata-rata Biaya Produksi Perempuan Pengusaha Sagu Biaya Produksi Biaya Produksi Biaya Produksi Sagu Total Biaya Produksi Lempeng (Rp) Sagu Gula (Rp) Tumbu (Rp) (Rp) 1,062,706 23,833 430,500 1,516,039 Nilai BCR Rata-rata = Bi/Ci =1.517.039/663.869 BCR = 2.2. satuan 85 Hasil Analisa Statistik dengan Bantuan Program SPSS 14 Model Summery (b) Model R R square Adjusted R sqaure Std. Error of the estimate Change Statistics R Square Change F Change I .698(a) 0.488 0.307 1,405,642.164 0.488 2.695 a. Predictors: (Constant), X6harga, X5Produksi, X4JBT, X3Pengalmn, X2TPF, X1Umur b. Dependent Variable: YIbu Coefficients (a) Model Unstandardized Coefisients Standardized Coefisients t sig. B Std. Error Beta I (Constant) -6,759,492.644 2,870,766.644 -2.355 0.031 X1Umur 29,701.458 40,490.638 0.258 0.734 0.473 X2TPF 80,305.244 173,385.430 0.093 0.463 0.649 X3Pengalamn -12,208.942 31,788.794 -0.134 -0.384 0.706 X4JBT 263,627.285 132,677.025 0.387 1.987 0.063 X5Produksi 292.757 529.398 0.111 0.533 0.587 X6harga 2,457.894 728.574 0.625 3.374 0.004 Dependent variable: Y (Pendapatan Perempuan Pengusaha Sagu Lempeng) Predictors: (Constant) : X6 tingkat harga, jual; X5: jumlah produksi, X4: jumlah beban tanggungan, X3: pengalaman berusaha X2: tingkat pendidikan formal; X1: umur 86 THE EFFECT OF THE GLOBAL ECONOMIC CRISIS ON MILK AGRIBUSINESS IN INDONESIA Lukman Mohammad Baga Departemen Agribisnis, FEM-IPB, Bogor Agricultural University Jln. Kamper, Kampus IPB Darmaga, Bogor, 16680, Indonesia
[email protected] Rahmat Yanuar Departemen Agribisnis, FEM-IPB, Bogor Agricultural University Jln. Kamper, Kampus IPB Darmaga, Bogor, 16680, Indonesia
[email protected] Feryanto William Karo-Karo Departemen Agribisnis, FEM-IPB, Bogor Agricultural University Jln. Kamper, Kampus IPB Darmaga, Bogor, 16680, Indonesia
[email protected] ABSTRACT Approximately 70% of milk consumption in Indonesia must still be imported. The price battle among milk exporter countries during the global economic crisis caused the world milk price to decrease dramatically. Such condition benefited Milk Processing Industries in Indonesia however they neglected to absorb milk from local farmers. Many Indonesian dairy farmers suffered losses and have left their dairy agribusiness. This study aimed to investigate how far the competitiveness of Indonesian dairy agribusinesses has changed and how dairy co- operatives could be revitalized in order to strengthening their members’ bargaining power. INTRODUCTION Background of Problems The global financial crisis that began in the middle of 2008 brought a significant impact to the prices of dairy commodities in international markets. This situation certainly influenced conditions of dairy agribusiness in Indonesia where almost 70 percent of the milk consumed is imported (Darmawan, 2007). FAO (2008) explains that the index of milk prices in the international market (based 1998-2000 = 100), fell from 302 in November 2007 to 266 in April 2008. The largest decrease consisted in skimmed milk powder products with a decrease of the price by $3.500/ton. In Asia, 87 this situation was exacerbated by the cases of melamine-contaminated milk in China that made the trust of consumers of milk products decrease. In late 2007, a sign of declining prices of milk on the international market was seen. The high price of milk in 2007 made some milk exporting countries increase milk production. In the United States, despite high input costs, milk production was expected to grow 2 – 2.7 percent over the previous year. In New Zealand which suffered a drought in 2006 which meant that their milk exports stopped, expected to increase milk production by 8 percent. While in Australia, milk production was expected to increase by 2 percent. In the European Union, the 2008 milk production quota was expected to increase 2 percent. International milk supply was increasing with the entry of new producer countries namely Brazil and Argentina. Brazil had previously been an importer of milk, but began to become an exporter, especially in skim milk powder. Milk production in Brazil was expected to rise 8 percent in 2008. While in Argentina, production was expected to rise 6 percent. The increase in production in milk-producer countries made the international milk supply increase in 2008. While demand for milk from milk importing countries began to decrease because of the higher retail prices and economic uncertainty. In developing countries, the previous increasing milk prices at the international level encouraged countries to increase domestic milk production, especially in Algeria, China, Egypt, Malaysia and Thailand. As a result, some products made from imported milk powder were replaced with liquid milk, which is most often produced in developing countries. This in turn led to competition among milk-producer countries, which led to price competition. In Indonesia, the increase in international dairy prices in 2007 enabled the Milk Processing Industry (MPI) to compete with dairy farmers. As a result, milk prices of dairy farmers increased from Rp 2.800 - Rp 3.600 / liter to approximately Rp 3.500 - Rp. 3.900 / liter (Setiadi, 2007). However, this situation only lasted for one year, in line with the decline in international milk prices in the middle of 2008. Lower prices in the international market making the MPI begin importing milk from abroad and limited the absorption of local fresh milk. In addition, the international price that is cheaper than milk of the local dairy farmers, namely Rp 2.800 / liter. MPI import policy is based on the Regulation of the Ministry of Finance No. 145/PMK.011/2008. The objective of this policy is to make the MPI still survive in conditions of the global 88 financial crisis. However, instead of giving stimulus, the policies of the Minister of Finance threatened the lives of dairy farmers in this country. The MPIs do not want to absorb fresh milk from local farmers and to decrease the purchasing price of fresh milk. Proof of this is the purchasing price of the MPI which was reduced to Rp 300 / liter. On the other hand, farmers' production costs tended to increase. For example, the cost of concentrate feed, which ranged from Rp 1.000 - Rp 1.200 / kg became Rp 1.600 - Rp 2.000 / kg in 2007. The small-scale dairy farmers having a low bargaining position of dairy co-operatives toward MPI exacerbated this condition. This is reflected by the structure of prices received by dairy farmers or at the level of dairy co-operatives. These conditions made many dairy farmers suffer losses and left their dairy agribusinessess. Based on that background, this study aimed to investigate how far the competitiveness of Indonesian farmers‘ dairy agribusinesses and how farmers‘ dairy co-operatives could be revitalized in order to strengthen their members‘ bargaining power. Objectives 1) To investigate and measure the competitiveness of Indonesian farmers‘ dairy agribusinesses 2) To analyze the influence of input-output changes in government policy on the competitiveness of dairy co-operatives, especially in the import tariff policies and incentives for dairy farmers / dairy co-operatives 3) To formulate some strategies to improve the competitiveness of dairy co-operatives in West Java. METHODOLOGY Research Area This study was conducted in the central area of dairy agribusiness in West Java Province. West Java Province has been determined purposively. Whereas the centers of the selected districts covered West Bandung, Bandung, Bogor, and Garut, which is the central milk producer and in general, there are dairy co-operatives that accommodate the needs of farmers. Data and Sources 89 We used primary data and secondary data in this study. Primary data was obtained from dairy farmers, dairy co-operatives, traders, and collectors with direct interviews in the form of structured questions (questionnaire), Officer of Animal Husbandry Affair at District and Province level, board and members of dairy co-operatives. While secondary data was obtained from the Central Statistics Agency, the Ministry of Agriculture, Association of Dairy Co-operative in Indonesia (GKSI), as well as other agencies that could assist in providing the data that isused in this study. Methods Determination of Sample Farmers who serve as a sample in this study numbered 30 people for each district so the number of respondents would have as many as 120 dairy farmers. Determination of 30 people for each research area used a simple random method (simple random sampling). Analysis Method This analysis consisted of two phases, which were (1) competitiveness analysis using PAM (Policy Analysis Matrix) and sensitivity analysis; and (2) SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis. In the PAM analysis, we used Tanjung Priok Jakarta to be a reference in determining the border price. PAM analysis was conducted to identify farmers who have a competitive advantage in the applied input-output policies, and how they change their benefit in accordance with the change of the policy. Then, we conducted sensitivity analysis to see the impact of change of costs or benefits on economic activity. A sensitivity analysis was done by changing the elements or combination of elements and determine the impact of these changes on the original analysis. There are several assumptions that were used in this sensitivity analysis such as: (1) a sensitivity analysis if the import tariff to zero, 10 or 15 percent, causing the price of the actual output and the shadow price in this study experienced a change (up or down), with the assumption of other factors being equal (cateris paribus). (2) Sensitivity analysis of input prices (feed-concentrates) increased 20 and 30 percent of the actual price and shadow price, assuming other factors are considered fixed (ceteris paribus). Determination of the percentage increase in input prices (feed-concentrates) based in the event of increased exchange rate and inflation. (3) sensitivity analysis combining import tariff changes (0, 10 and 15 per cent) and increases in input prices at the level of 10, 20 and 30 per cent and other factors were considered fixed (ceteris paribus). So, we studies how these changes affect both the competitive advantage and comparative advantage of Indonesian milk producers.. SWOT analysis was conducted to formulate a strategy based on the strengths, weaknesses, opportunities and threats facing dairy co-operatives. Strategies were developed by combining the internal factors and external factors into the SWOT matrix. Through the SWOT matrix there can be developed four types of strategies, namely strategies of development, diversification, turn-around, and defense. Then the formulated strategies were mapped into a roadmap strategic. RESULTS AND DISCUSSION 90 Analysis of the Competitiveness of Dairy Co-operatives (Both Competitive and Compa- rative Advantages) Analyses of the competitive advantage consist of financial benefits and cost ratio (PCR) analysis. From this study, we found that the price of milk in the province of West Java is Rp 3.216,8 / liter. The total cost is Rp 1.814,59 / liter, which consists of tradable input costs of Rp 198,2 / liter and non-tradable input costs of Rp 2.286,5 / liter (Table 1). TABLE 1. RESULT OF POLICY ANALYSIS MATRIX (PAM) Revenue (Rp/Kg) Cost (Rp/Kg) Profit (Rp/Kg) Financial Domestic Market Price 3.216,8 198,2 2.286,5 732,1 Shadow Price 3.955,0 115,5 2.133,8 1.705,7 Impact of Policy -738,3 82,7 152,7 -973,6 Note: output price calculation based on actual conditions with the 5 percent import tariff Financial benefits gained as much as Rp. 732,1 which means that the profit of conducting dairy agribusiness to produce milk with the intervention of government policy is Rp 732,1 / liter. This indicates that dairy agribusiness by dairy co-operatives in West Java is financially profitable. The results of the PAM matrix analysis (Table 2) show that the PCR value obtained is 0,76 which indicates that dairy agribusiness of the dairy co-operatives in West Java are relatively efficient financially and have a competitive advantage. TABLE 2. INDICATOR OF POLICY ANALYSIS MATRIX (PAM) Indicator Value Private Profit (Rp) 732,10 Social Profit (Rp) 1.705,70 Output Transfer (Rp) -738,30 Input Transfer (Rp) 82,70 Factor Transfer (Rp) 152,70 Net Transfer (Rp) -973,60 Private Cost Ratio (PCR) 0,76 DRC 0,56 NPCO 0,80 NPCL 1,70 EPC 0,80 PC 0,40 SRP -0,20 Analysis of comparative advantage can be measured by using the social profit (SP) and domestic resource cost (DRC). Table 3 shows that the amount of social profit obtained from co-operative dairy business was worth Rp 1.705,7 / liter of milk (positive value), which 91 means the business of dairy cooperatives are economically profitable even without implementation of government policy. Besides economic benefits, comparative advantages of dairy co-operative business can also be ascertained from the ratio of domestic resources (DRC). This is the ratio between the cost of non-tradable to the difference between income minus the cost of the shadow price of tradable products (i.e. without government intervention). DRC stated that a business is economically efficient if its value is less than one and vice versa. Results of analysis show that the obtained value of DRC is 0,56. This means that to obtain value added from Rp 3.955,0/liter of milk is required an additional domestic factor costs Rp 2.133,8 / liter of milk. Therefore, it can be said that the milk agribusiness is efficient in using economic resources. DRC value of 0,56 can also explain that producing milk in West Java Province needs cost 0,56 percent of the cost of imports. As we know that fresh milk is a substitution product of imported milk, and thus to fulfill domestic needs, the fresh milk should be produced in Indonesia and does not need to be imported from abroad. Analysis of the Impact of Government Policies on Dairy Co-operatives A government policy can provide a positive or negative impact on economic behavior. The following describes some of the PAM indicators that show the impact of government policies. As seen in Table 3, value of NT is negative, namely Rp. 973,6 per liter, which means that the existing government policies on both input and output do not provide economic incentives to increase milk production. With government intervention, the profits of milk producer are lower Rp. 973,6 compared to without government intervention. The value of effective protection coefficient (EPC <1) is 0,8. This means that the government's policy toward the input-output causes milk producers or dairy co-operatives to not get the additional benefit amounting to 80 percent from shadow prices. This shows that government policies do not provide good protection to the dairy agribusiness. Producers receive prices of tradable input or output which is below its efficient price (lower than world prices). This indicates that milk producers get only small benefits of the subsidy due to lack of protective government policy to the milk producers (dairy co-operatives and farmers). The Sensitivity Analysis of Dairy Agribusiness Sensitivity analysis with variations of 11 scenarios of output price changes (whether actual or shadow) by the change in import tariffs, and input prices (feed) shows that scenario 3 is the best scenario because it shows the level of higher competitiveness compared with other scenarios, namely the determination of import tariffs by 15 percent (Table 3). In the scenario 3, we can see that the value of social and private benefits is Rp. 1.085,3 / liter and Rp. 2.100,6 / liter, which is economically more profitable. The competitive and comparative advantages which are shown by the DRC and the value of PCR which each have a value amount 0,50 and 0,68, which is based on these values obtained information that the conditions of competition best obtained by farmers and cooperatives who at the time have import tariffs by 15 percent. TABLE 3. THE SENSITIVITY ANALYSIS OF DAIRY BUSINESS IN WEST JAVA PROVINCE Scenario Price Changes Competitiveness Indicators Profitability (Rp/l) PCR DRC Private Social 92 1 If import tariff 0 percent 411,0 1.508,2 0,85 0,59 2 If import tariff 10 percent 924,7 1.903,2 0,71 0,53 3 If import tariff 15 percent. *) 1.085,3 2.100,6 0,68 0,50 4 If price of feed increase 20 percent 588,8 1.578,2 0,80 0,59 5 If price of feed increase 30 percent 517,2 1.514,4 0,83 0,60 6 If import tariff 0 percent and price of feed increase 20 percent 267,7 1.380,7 0,90 0,62 7 If import tariff 0 percent and price feed increase 30 percent **) 196,1 1.316,9 0,93 0,64 8 If import tariff 10 percent and price of feed increase 20 percent 781,5 1.775,6 0,75 0,56 9 If import tariff 10 percent and price of feed increase 30 percent 709,9 1.711,9 0,78 0,57 10 If import tariff 15 percent and price of feed increase 20 percent 942,1 1.973,1 0,72 0,53 11 If import tariff 15 percent and price of feed increase 30 percent 870,4 1.909,3 0,74 0,55 *) changes that give the highest value of PAM indicator Analysis and Formulation of Strategies to Increase the Competitiveness of Dairy Co- operatives From the results of the identification of internal factors, external opportunities and threats faced by the dairy co-operatives we could develop several strategies to increase the competitiveness of Indonesian milk co-operatives. We categorized these strategies into four groups. First is a development strategy that consist of four sub-strategies, i.e.; (a) development and improvement of dairy co-operative business through the concept of clusters, (b) encouraging promotional activities of importance to both consumption of milk and the stabilization of a milk marketing management system and its derivatives, (c) encouraging dairy cooperatives to develop a business unit of milk diversification, and (d) strengthening medium scale units business of milk processing. The second is a turn-around strategy that consists of two sub-strategies which are (e) strengthening the provision of capital through co- operative finance schemes, improving the quality and quantity of milk production, and (f) establishing post-harvest processing of dairy units, which are managed by dairy co- operatives. The third is a diversification strategy, which is to improve the bargaining position of dairy cooperatives through government support and policies, so that dairy co-operatives‘ bargaining position will be more balanced toward the MPI position as the main buyer of fresh milk production from dairy co-operatives. The fourth is a defense strategy, by issuing a policy to consume domestic milk products. The last strategy is the provision of subsidized inputs and outputs for the local dairy producers (dairy farmers and co-operatives). Finally, those nine strategies or sub-strategies were ordered by an execution priority based on the interests and capabilities of implementation using the roadmap strategy (Figure 1). CONCLUDING REMARKS 93 1. Dairy co-operatives and dairy agribusiness in Indonesia have competitive and comparative advantage and are still able to finance domestic input, although this tends to decrease. 2. Policies issued by central and local governments are not ideal for improving business efficiency of dairy agribusiness in West Java. This indicates that government policy in giving a positive subsidy is a disincentive for dairy agribusiness, so some of these policies have failed. 3. Based on sensitivity analysis, the government can impose a policy of charging foreign milk imports by 15 percent (according to scenario 3), which indicates the increasing of competitiveness and efficiency of dairy agribusiness in West Java. 4. There are nine strategies or sub-strategies which are formulated to enhance the competitiveness of dairy farmers through dairy co-operative institutions, in order to increasing the prosperity of dairy farmers. 5. Improving the competitiveness of dairy co-operatives can be dwveloped with a comprehensive policy by considering the priority of the strategies that have been formulated in the road map. 94 FIGURE 1. ROADMAP OF THE COOPERATIVE COMPETITIVENESS DEVELOPMENT 95 REFERENCES Darmawan, T. (2007). Industri Susu Nasional Butuh Tambahan Investasi. Republika, 17 April 2007. www.depperin.go.id/ind/publikasi/berita_psb/2007/2007303. DOC. 23 Juni 2009. Dairy: World Markets and Trade. (2009). www.thedairysite.com/articles/.../dairy-world- markets-and-trade. 17 Maret 2009 Direktorat Jenderal Peternakan. (2008). Statistik Peternakan 2008. Departemen Pertanian. Jakarta. __________________________. (2003). Statistik Peternakan 2003. Departemen Pertanian. Jakarta. Ditjen Bina Produksi Ternak Departemen Pertanian. (2008). Populasi dan Perkembangan Usaha Peternakan Indonesia. Departemen Pertanian. Jakarta. _______________________________________________. (2009). Populasi dan Produksi Ternak Indonesia. Departemen Pertanian. Jakarta. FAO. (2008). Food Outlook 2008. www.fao.org/docrep/010/ai466e/ai466e00.htm. 15 Juli 2009 FAO. (2009). Food Outlook 2009. www.fao.org/docrep/011/ai482e/ai482e12.htm. 15 Juli 2009. GKSI. (2008). Harga Susu Sapi Perah Segar Tingkat Peternakan dan Koperasi Susu di Jawa Barat. Jakarta. Monke, E. A and S.R. Pearson. (1998). The Policy Analysis Matrix for Agriculture Development. Cornell University Press : Itacha and London. Pearson, S. and G. Carl. Translator Sjaiful Bahri. (2004). Application of The Policy Analysis Matrix in Indonesian Agriculture. Yayasan Obor Indonesia : Jakarta Setiadi, D. (2007). Koperasi Susu: Kenaikan Harga Susu Wajar dan Gairahkan Peternak. www.antara.co.id/print/1183473906. 23 Juni 2009. 96 GLOBAL CRISIS HAS DELIVERED INDONESIA AGAINST THE NEGATIVE IMPACT OF EARLY HARVEST PROGRAM WITH CHINA Adrian D. Lubis Ministry of Trade, Indonesia
[email protected] ABSTRCT Liberalization of trade between Indonesia and China through the China ASEAN Free Trade Agreement started in 2006, through the concept of the Early Harvest Program. However, this paper uses the competitiveness index and multiple regression analysis found that prior to the implementation of EHP, Indonesia’s competitiveness of the products is already low, and its trade balance has already been in deficit witht China. This paper finds that the trade balance and the Indonesia-China trade performance is strongly influenced by changes in GDP, and the economic crisis cut the Indonesian deficit. However, in line with the relative‖ escape‖ of Indonesia and China from the economic crisis, it is of concern that Indonesian deficit trade balance witht China will become even greater. Keywords:competitiveness, global crisis , trade balance.e INTRODUCTION Since January 2006, Indonesia has been implementing a free trade agreement with China through the Early Harvest Agreement Program (EHP) which is part of the China- Asean Free Trade Agreement (CAFTA). Some products have tariff elimination on the implementation of EHP. They are meat products, fish, dairy products, non-edible animal parts, vegetable products, edible vegetables, fruits, and nuts (Directorate General of KPI, 2005). There are three stages in the course of the CAFTA, i.e. 1. Early Harvest Program, 2. Normal Track I and II, and III. Sensitive / Highly Sensitive List. EHP implementation 97 consists of a gradual elimination of tariffs for types of products mentioned earlier from January 1, 2004 up to zero percent on January 1, 2006. As for the liberalization of the normal track consisting of the gradual elimination of tariffs starting on July 20, 2005 so that this becomes zero in January 2010, for products which are not included into the EHP and the sensitive list. The sensitive product/highly sensitive list is a product that has tariffs above 20 percent, including handbags, wallets, shoes, eyeglasses, musical Instruments: wind instruments; string instruments, dolls, sporting goods, stationary, iron and steel, spare parts, conveyance, glokasida and vegetable alkaloids; organic compounds, antibiotic, glass, and plastic goods (Directorate General of KPI, 2005). This condition is an indication that the CAFTA liberalization-which is being applied by Indonesia actually occurs through gradual liberalization since January 2006 until January 2018. In addition, abolition of tariffs does not apply to all products in the CAFTA liberalization. CAFTA still allow the application of a tariff of 5 percent for sensitive products and 50 percent for the highly sensitive list. Those indications are contrary to the assumption of several parties, who believes that there is no introduction and preparation to implement CAFTA liberalization for national industry . Some national industries have expressed their fears that the liberalization of ASEAN-China will increase China's export of goods and seize the Indonesian domestic market. Some agricultural products cannot compete with products from China, such as citrus fruits, and vegetable products. However, whether increased imports can only occur after the implementation of CAFTA, or much earlier, they still need to be studied further. Reviews Related to Liberalization and the Global Crisis Liberalization in Indonesia has significant correlation with political and economic conditions, especially the economic crisis in 1997. Soesastro and Basri (2005) found that the economic crisis in 1997 forced the government to turn to the IMF and to adopt an economic recovery and reform program including in trade. They also conclude that FTAs have become an element of Indonesia‘s international economic diplomacy. However, Indonesia will negotiate FTAs only with a few major trading partners, and the policy is aimed at producing high quality agreements. Other study from Sally and Sen (2005) found that other ASEAN countries have different conditions to Indonesia. They paper 98 concludes that ASEAN countries cannot rely on external tracks ―from above‖ for meaningful trade policy reform. Rather they have to rely on themselves ―from below‖ as it were. The engine of liberalization and regulatory reform has to be home-driven, with governments taking unilateral measures in response to internal and external conditions. CAFTA liberalization was originally intended as an opportunity for Indonesia to enter the China market, where the state has relatively low tariff rates and a large population. This was expected to enhance cooperation between business in both countries through the establishment of "strategic alliances" and to increase certainty for superior products of Indonesia in the China market opportunities. This collaboration was also expected to enhance technology transfer between businesses in both countries (Directorate General of KPI, 2005). Awareness of Indonesian intentions with other Asean countries enforcing free trade agreements, has caused concern for some parties. Chirativat (2002) predicts that the FTA will increase trade performance for both parties. China's markets and industries- which are large and have rapid growth so they will require a lot of raw materials and semi-finished materials from ASEAN. This cooperation is predicted to strengthen both s economies in the future. However, the simulation results of Park et.al (2008) found that ASEAN needs a transitional period in order to reap the benefits of CAFTA liberalization. ASEAN industries are less competitive than those of China. The unpreparedness of ASEAN countries in this liberalization will lead to losses for ASEAN industry. However, if the ASEAN industry manages to adapt itself through the investment of labor and technology, this will enhance the competitiveness of ASEAN products with products from China. A study of Chen and Yan (2007) by using the gravity model predicts that the impact of CAFTA will create a trade diversion effect which will be much larger than trade creation. This condition may cause the impact of CAFTA to reduce China's future prosperity as they predicted. Meanwhile Sudsawad and Mongsawad (2007) predict that CAFTA will reduce the trade balance for Indonesia, Philippines, Singapore and Thailand, except for Malaysia. However, this lliberalization will increase national income (gross domestic product) and have an equivalent variation for all five ASEAN members, which are Indonesia, Malaysia, Philippines, Singapore and Thailand. Batra (2007) studied the 99 impact of EHP for China, and compared its impact for other Asian countries, such as India. The study found that the EHP of the ASEAN-China FTA that offers tariff concessions on commodities of sectors 1-8 (HS) will have a negative impact on India. Products like marine products such as fish, molluscs, and leguminous vegetables are likely to suffer. China is relatively better prepared to deal with CAFTA than the ASEAN countries. This condition is caused by the policy of increasing access to markets and rapid market transformation during China‘s policy reform. Zicheng (2007) found that the liberalization of China reduced the number of rural poor through economic growth. However, this condition is precisely to reduce the main factor driving China's competitiveness, which is cheap labor. Yin (2007) found that since the liberalization, wage differences among the four Asian dragons is running low. One explanation of this is the liberalization causes an increase in average wages per month in China, which have increased by 20 percent during the period 1988-1995. Imperical Data Changes in Indonesia's trade performance to China for the products covered by the EHP during 1998-2009 can be seen in Table 1. This shows that the value of Indonesia's total exports dropped from U.S. $ 100.5 million in 1998 to U.S. $ 88.3 million in 2009. This was due to lower export value of fruit and fish products of Indonesia. The decline in export value of Indonesian fish products due to China's 2007 embargo on these. because the Indonesian shrimp and fish products were suspected of containing toxins, pathogens, and hazardous chemicals. Although this embargo was lifted in 2008, the inspection requirements are stringent and so it is difficult to meet Indonesian exporters‘ expectations. The performance of Indonesian fruit exports to China was also not improved after the implementation of EHP in 2006. This is because of export procedures and quarantine policies in China which are strict. 100 TABLE 1. INDONESIAN TRADE PERFORMANCE CHANGE TO CHINA TO EHP PRODUCTS Description 1998 2009 US $ 000 A.Export Meat 0.00 54,389.35 Vegetable Products 7.15 19,894.39 Edible Vegetables 5,563.29 5,225.53 Fruit And Nuts 12,102.40 3,642.47 Dairy Products 0.00 2,132.51 Non-Edible Animal Parts 0.00 1,779.12 Fish 82,828.51 876.87 Live Animals 6.89 387.51 A. Total (HS 01-08) 100,508.24 88,327.74 B. Import Meat 51.29 0.00 Vegetable Products 379.89 10.29 Edible Vegetables 355.82 0.00 Fruit And Nuts 919.59 62,857.15 Dairy Products 5,893.05 7,589.07 Non-Edible Animal Parts 90.11 9,150.41 Fish 39,065.23 71.30 Live Animals 8,222.54 196,497.28 B.Total (HS 01-08) 54,977.51 276,175.50 C. Trade Balance Meat -51.29 54,389.35 Vegetable Products -372.74 19,884.10 Edible Vegetables 5,207.48 5,225.53 Fruit And Nuts 11,182.81 -59,214.68 101 Dairy Products -5,893.05 -5,456.57 Non-Edible Animal Parts -90.11 -7,371.29 Fish 43,763.29 805.57 Live Animals -8,215.65 -196,109.77 C. Total (HS 01-08) 45,530.73 -187,847.76 Source : Statistic Indonesia, calculated Indonesian imports of fruit products, poultry and derived products increased rapidly during 1998-2009. Fruit products from China, the main onesbeing oranges and variants, while for livestock the most popular are poultry and poultry products. While for beef and other dairy products, until recently Indonesia have not imported these products from China because that country has not been free from foot and mouth disease. Indonesia's export performance decrease compared to imports from China for eight products causing Indonesia's trade balance with China during 1998-2009 to change. In 1998 Indonesia had a surplus of U.S. $ 45.5 million, but in 2009 this became a deficit of U.S. $ 187.8 million. However, it should be noted that the balance of trade deficit has actually happened before the EHP came in force in 2006. This can be seen in detail in Figure 1. It can be seen that the value of Indonesian exports to China have begun to fall since early 2000, and were relatively stagnant until 2009. Even so, there are some fluctuations in the relatively high increase in exports in 2003 and 2004. In contrast, Indonesian imports for products from China increased rapidly since 2000 up to 2005. This shows a deficit for Indonesia in particular to HS 01-08 products which occurred long before the implementation of EHP in 2006. Indonesia's imports which increased significantly for farm products, fish, vegetables and fruit from China, show relatively different trends from the conditions of China's major trading partners, namely the European Union, the United States and Japan. A Study byHakim (2010) found that China's competitiveness in the world tends to decrease since 2000. This is caused by its main trade partners who began to impose non- tariff barriers such as standards, sanitary and phitosanitary that cannot be fulfilled by products from China. This policy is not intended to restrict market access, but aims to 102 protect consumers from products that endanger health. For instance, during 2002-2006 the U.S. government did not admit 1,110 freighters from China because the food did not meet health standards related to the content of food substances, pesticide residues, and hygiene. Changes in trade balance between Indonesia and China during 2000-2008 showed a significant decline in Indonesia despite the exchange rate remaining relatively unchanged during that period. Also, during that period, national income (Gross Domestic Product) of both Indonesia and China showed significant growth. 103 FIGURE 1. EHP PRODUCTS EXPORT PERFORMANCE OF INDONESIA-CHINA Source: Statistic Indonesia, processed FIGURE 2. CHANGES IN TRADE BALANCE CHANGES INFLUENCED BY INDONESIA AND CHINA'S GDP Source: Statistic Indonesia, processed Crisis Crisis 104 METHODOLOGY Data used in this study are all from secondary data consists of trade data between Indonesia and China from Statistic Indonesia, exchange rates and national income (GDP) from the International Financial Statistics. Furthermore, these data are used to analyze changes in competitiveness and the factors affecting bilateral trade balance changes by using the competitiveness index and multiregression analysis with dummy variables. Competitiveness Index The competitiveness analysis used in this study is a model of Bilateral Reveal Comperativeness Advantage which is a development of the Balassa model (ITC, 2000). The equation used is : (1) where : t i t i M and X .. .. = total export and import i in year t t icl t icl M and X . . = total export and import cluster cl from i in year t t icl t icl M X . . ÷ = trade balance i for cluster cl in year t ( ) ( ) t i t i t icl t icl M X M X .. .. . . + + = share cluster cl di i total export in year t ( ) ( ) ( ) t i t i t icl t icl t i t i M X M X M X .. .. . . .. .. * + + ÷ = the theoretical imbalance of country i for the cluster cl in year t. Multiple Regression With Dummy Variabel This equation is actually based on the model of McCallum (1995), which uses models to estimate the gravity model of factors affecting export performance. The equations used are as follows: (2) ( ) ( ) ( ) ( ) ( ) ( ¸ ( ¸ + + ÷ ÷ ÷ + = t i t i t icl t icl t i t i t icl t icl t i t i t icl M X M X M X M X M X RCA .. .. . . .. .. . . .. .. * * 1000 105 Where : = export region i to region j = gross domestic product in region i and region j = distance between i and j = dummy variabel However, the above equation was developed with the aim of analyzing the factors influencing changes in the trade surplus, which is reflected as exports minus imports (xij- Mij), and how to influence the exchange rate (ER) and government policies in influencing the trade surplus. Furthermore, the data in Figure 2 shows that the exchange rate of the Indonesian Rupiah against the United States Dollar was not fluctuating. Therefore, equation 2 above reconstituted: (3) Where : = trade surplus region i to region j = gross domestic product in region i and region j = nilai tukar Rupiah terhadap US $ = dummy early harvest proggram = dummy crisis economi Furthermore, to compare the impact of changes in GDP, exchange rates, EHP and the economic crisis on trade surpluses, an analysis is performed to find out the impact of changes in the five variables mentioned above to the value of Indonesian exports and imports with China. This equation is formulated as follows (4) dan (5) Where : = region i export to region j = region i import from region j 106 i = Indonesia j = China Competitiveness and Change Analysis of Factors Affecting Trade Surplus Competitiveness Changes in the competitiveness of farm products, fish, vegetables and fruits Indonesia against products originating from China can be seen in Figure 3 Based on these images, it can be seen that the decline in the competitiveness of Indonesia had occurred long before the implementation of the EHP. Figured 3 shows the comparative performance of Indonesia's trade with China against products that are included in the EHP, where it has a sole fishery products which have competitiveness, fishery products werethe only one which has a competitive advantage. Results show that the competitiveness of Indonesian fishery products is high compared to products from China during 1998-1999, but dropped dramatically since 2000. Since 2000, the competitiveness of fishery products is relatively stable, but again fell in 2007 when China made its embargo on imports of the fishery products of Indonesia. Competitiveness of fishery products decreased since 2000 due to increased imports of shrimp products being very high in that year. Increased imports of shrimp to China from Indonesia coincided with the policy of the main partners of China such as the United States, EU and Japan who imposed non-tariff barriers such as standards and phitosanitary against shrimp fishery products originating in particular from China. This condition shows China diverted the export of fishery products, especially the shrimp not able to enter the United States, European Union and Japan to Indonesia, as a new potential market. 107 FIGURE 3. DECREASE IN COMPETITIVENESS INDONESIA THAN CHINA PRODUCTS HAPPENED SINCE THE YEAR 2000 EHP Crisi s 108 Source: Statistic Indonesia, calculated 109 In addition to fishery products, during periods of economic crisis, there are two other products that have increased bilateral competitiveness against products from China, which are products consisting of meat and vegetables, and flowers. The improving competitiveness of Indonesia for meat products is due to the decline in meat imports related to government policy banning meat imports from China because it has not been free from foot and mouth disease. The competitiveness of Indonesia for vegetables and to increases in flower exports from Indonesia to China is significant during the period. During the period 1998-2009, Indonesia has a weak competitiveness for edible vagetables, fruits and nuts. Weak competitiveness is reflected from the value of Indonesian imports of Indonesian products and vegetables and fruit which was high during 1998-2007. However, Indonesia's export value of vegetables and fruit products to China declined in 2008 to the second quarter in 2009. The calculation of competitiveness shows that there are no Indonesian products that have higher competitiveness of products from China. Indonesian products that have the ability to penetrate the Chinese market before and during the implementation of EHP are the fishery products. On the other hand, China has a far greater variety of products so it can trate the Indonesian market for vegetable products, fruits and milk. This competitive imbalance has caused implementation of the EHP to be more profitable for China than for Indonesia. Analysis of Trade Balance Calculation results in Table 2 shows the significant variables affecting the change in trade balance for the EHP products in Indonesia's GDP and the GDP of China, the Indonesian exchange rate , and lag variables. The result of Indonesia's GDP estimate shows an increase of 1 percent would reduce the trade balance amounting to 2.358 percent, while a one percent change in improving the trade balance of China's GDP of Indonesia amounts to 1.718 percent. This situation shows, that the increase in GDP of Indonesia stimulates a larger increase in imports from instead of exports to China. This indicates that Indonesia against China's trade balance is expected to decline if the economy returns to normal after the two countries emerge from the economic crisis. TABLE 2. FACTORS AFFECTING TRADE BALANCE Variable Coefficient Std. Error t-Statistic Prob. 110 Indonesia GDP -2.358013 0.752331 -3.134275 0.0035 China GDP 1.718690 0.528576 3.251546 0.0026 Indonesia Exchange Rate -2.160205 1.246582 -1.732903 0.0922 Dummy EHP -0.036996 0.362658 -0.102012 0.9193 Dummy Crisis 0.431348 0.373128 1.156032 0.2557 Lag Variabel 0.490256 0.153430 3.195300 0.0030 Constanta 18.37428 12.15808 1.511281 0.1400 R-squared 0.697486 Mean dependent var -1.142366 Adjusted R-squared 0.644101 S.D. dependent var 0.803274 S.E. of regression 0.479211 Akaike info criterion 1.520902 Sum squared resid 7.807880 Schwarz criterion 1.813463 Log likelihood -24.17849 Hannan-Quinn criter. 1.627437 F-statistic 13.06522 Durbin-Watson stat 1.526773 Prob(F-statistic) 0.000000 Source: Statistic Indonesia, IMF, calculated Estimation results indicate changes in Indonesia‘s exchange rates will cause a decrease in trade surplus. This is consistent with the assumption, where the rate will increase the value of imports and reduce the value of Indonesian exports to China. However, estimated results indicate that the impact of EHP does not significantly affect Indonesia‘s trade balance. These findings are consistent with the initial assumption based on the data in Figures 1 and 2, where the Indonesian balance of trade deficit occurred long before the implementation of the EHP. TABLE 3. FACTORS AFFECTING THE INDONESIAN EXPORT TO CHINA Variable Coefficient Std. Error t-Statistic Prob. Indonesia GDP -1.855672 0.570300 -3.253854 0.0026 China GDP 1.928572 0.456230 4.227190 0.0002 Indonesia Exchange Rate -2.487795 0.960618 -2.589785 0.0140 Dummy EHP -0.014302 0.301353 -0.047459 0.9624 Dummy Crisis 0.223094 0.302609 0.737235 0.4660 111 Lag Variabel 0.345137 0.147111 2.346092 0.0249 Constanta 20.32028 9.132611 2.225024 0.0328 R-squared 0.580998 Mean dependent var 2.657780 Adjusted R-squared 0.507056 S.D. dependent var 0.585460 S.E. of regression 0.411051 Akaike info criterion 1.214054 Sum squared resid 5.744748 Schwarz criterion 1.506616 Log likelihood -17.88812 Hannan-Quinn criter. 1.320589 F-statistic 7.857532 Durbin-Watson stat 1.357969 Prob(F-statistic) 0.000024 Source: Statistic Indonesia, IMF, calculated Estimation in Table 3 show that the significant variables affecting Indonesian exports to China are Indonesia's GDP, China's GDP, and exchange rates of Indonesia. These three variables show the same signs with estimates of factors affecting the trade balance of Indonesia. From this estimation result, it seems that the economic recovery of both countries will increase the value of Indonesian exports to China, but the Rupiah appreciation will significantly eliminate the export performance improvement. In addition, estimation results indicate that the implementation of the EHP and the condition of the global crisis did not significantly affect Indonesia's exports to China. It is Indonesia‘s weak competitiveness with Chinese products that causes the implementation of the EHP to not be significant enough to increase exports, making it difficult for Indonesia to take advantage of EHP to penetrate the China market. TABLE 4. FACTORS AFFECTING INDONESIA IMPORTS FROM CHINA Variable Coefficient Std. Error t-Statistic Prob. Indonesia GDP 0.786917 0.391366 2.010695 0.0523 China GDP 0.154125 0.268265 0.574523 0.5694 Indonesia Exchange Rate 0.346076 0.539187 0.641847 0.5253 Dummy EHP -0.133544 0.163927 -0.814655 0.4209 Dummy Crisis -0.358243 0.174623 -2.051521 0.0480 Lag Variabel 0.408893 0.147300 2.775931 0.0089 112 S SSource: Statistic Indonesia, IMF, calculated Estimation results in Table 4 shows that the significant variables affecting Indonesia's imports from China are Indonesia's GDP and the Economic Crisis Dummy. Results of estimates of GDP according to the basic assumptions, as well as the impact of the economic crisis reduces the value of Indonesian imports from China. Estimation results confirm the early assumption that the economic crisis caused a decrease in the value of Indonesian imports from China, and reduced the trade balance deficit. However, caution must be taken if Indonesia and China have recovered from the negative impact of the global economic crisis, the deficit of Indonesian trade balance on China's products is expected to become more severe. CONCLUSIONS AND RECOMMENDATIONS This paper finds that : a. Indonesian balance of trade deficit with China for 01-08 HS product occurred before the implementation of the EHP. This is due to the loss of Indonesia's competitiveness on eight products in China‘s market. Constanta -5.044435 5.169973 -0.975718 0.3361 R-squared 0.871083 Mean dependent var 3.800220 Adjusted R-squared 0.848333 S.D. dependent var 0.625830 S.E. of regression 0.243726 Akaike info criterion 0.168710 Sum squared resid 2.019686 Schwarz criterion 0.461271 Log likelihood 3.541440 Hannan-Quinn criter. 0.275245 F-statistic 38.28917 Durbin-Watson stat 1.862173 Prob(F-statistic) 0.000000 113 b. EHP implementation has not been proven to improve the trade balance deficit of Indonesia on the products covered by this scheme. This has denied the public assumption that the implementation of the liberalization of the ASEAN-China has caused a trade balance deficit. c. Apparently, the monetary crisis caused an increase in the trade balance of Indonesia on the EHP products. If Indonesia's GDP was associated with a greater elasticity to changes in trade balance and import, this is an indication that Indonesia has become an alternative market for their products which China can not penetrate traditional markets like the U.S., EU and Japan. Based on these conclusions, it is recommended that Indonesia increase its competitiveness against China through a series of policies that enhance the productivity of livestock products, fisheries, fruits, and vegetables. Some policies can be proposed in order to increase the productivity of seed and feed products, related research efforts to increase productivity and harvest and post harvest procedures. The existence of the harvest and post harvest procedures clearly is one of the standardization policies and procedures commonly used in developed countries to hinder the entry of cheap imported products that do not conform with the national health standards. 114 REFERENCES Batra, A. 2007. Asian Economic Integration : ASEAN+3+1 or ASEAN+Is?ASEAN Economic Bulletin Vol. 24, No. 2, pp. 181-204. Chen H., and T. Yan. 2007. The Static Trade Effects in China under CAFTA : The Empirical Analysis Based on the Gravity Model. The Sixth Wuhan International Conference on E- Business Chirathivat, S. 2002. ―ASEAN-China Free Trade Area: Background, Implications and Future Development.‖ Journal of Asian Economics 13(5): 671–86. Ditjen KPI. 2005. Implementasi Penurunan Tarif Bea Masuk Dalam Perjanjian Perdagangan Bebas Asean-China. Departemen Perdagangan, Jakarta. Hakim, D.B., 2010. China-ASEAN Free Trade Area. www.ipb.ac.id Park, D., I. Park, G. Esther, and B. Estrada. 2008. Prospects of an ASEAN–People‘s Republic of China Free Trade Area: A Qualitative and Quantitative Analysis. Economics Working Paper Series No. 30, Asian Development Bank. McCallum, J. 1995. National Borders Matter: Canada-US Regional Trade Patters. American Economic Review. June, 85(3), pp.615-623. Sally, R. and R. Sen. Whither Trade Policies in Southeast Asia? The Wider Asian and Global Context. ASEAN Economic Bulletin Vol. 22, No. 1 (2005), pp. 92–115. Soesastro, H. and M. C. Basri. The Political Economy of Trade Policy in Indonesia. ASEAN Economic Bulletin Vol. 22, No. 1 (2005), pp. 3–18. Sudsawasd, S. and P. Mongsawad. 2007. Go with the Gang, ASEAN!. ASEAN Economic Bultetin Vot. 24, No- 3, pp. 339-56. International Trade Centre (ITC), 2000. The Trade Performance Index, Background Paper. ITC Market Analysis Section, Geneva. Yin H. 2007. Who is Better Off from Trade Liberalization? An Experience from Urban China. Asian Economic Journal, Vol. 21 No. 3, p. 283–299. Zhicheng L. Trade Liberalization, Economic Restructuring and Urban Poverty: The Case of China. Asian Economic Journal 2007, Vol. 21 No. 3, p. 239–259. 115 POTENTIAL OF AGRICULTURAL LEADING COMMODITY BUSINESS IN MERAPI MERBABU AGROPOLITAN AREA MAGELANG, INDONESIA Tinjung Mary Prihtanti, SP.MP Agribusiness Department Agricultural Faculty Satya Wacana Christian University, Jl. Diponegoro 52-60 Salatiga 50711 Telp. (0298) 321212, Fax. (0298) 321433
[email protected] ABSTRACT The Indonesian agricultural sector could actually improve as well as being the backbone for the development of the real sector from the economic crisis. The agropolitan concept has developed as a new rural development strategy. As an agricultural town, Magelang district has improved programs to develop production centers, agribusiness and agro-industries development, and fulfill upstream to downstream production infrastructure. According to Location Quotient analysis, four main types of crash crops, six kinds of vegetable commodities, and five types of fruit from the 8th district of the agropolitan area were selected for study. Vegetables and fruits commodities have potential to penetrate more in national and international markets. Keywords: main commodity, agropolitan INTRODUCTION The Indonesian government continues to improve its ability for self-sufficiency in agriculture. The increasing population in Indonesia which is estimated to reach 400 million in 2035, has raised worries of "food insecurity" in the future. On the other hand, the urbanization process has forced the agricultural sector to decline in terms of land availability, characterized by the conversion of agricultural land area into urban areas, where in the north coast of Java, this is reaching approximately 20% (Population Survey Data (SUPAS)). The logical consequence of the competition ground and agricultural activities is decreasing agricultural productivity. One alternative solution is regional development, especially the development of agricultural production areas (rural) without ignoring urban areas is through the development of agricultural areas or 'agropolitan' (Friedman and Douglas (1975)). Through the development of an agropolitan, a strong interaction is expected between the central region and agricultural production areas in the system agropolitan area. An agropolitan region is also characterized by the growth of the operation system and agribusiness agropolitan center serving and encouraging the development of agribusiness activities in the surrounding regions. The growth of agropolitan areas is expected to support the development of integrated cities system. An agropolitan area is a network of areas based on agriculture with functions as a residences area, distributes government services, social services, and economic activities. The development of agropolitan areas, as part of national development will reduce urban bias, and the development of cities is expected to cause no depletion of rural areas. 116 Indonesia has become a pioneer in implementing the agropolitan concept. Central Java Province gives serious attention to regional development through agropolitan activities. Figure 1 represents the distribution of an agropolitan area defined as a region in Central Java province: FIGURE 1. AGROPOLITAN REGION OF CENTRAL JAVA PROVINCE Central Java Province, has prepared a master plan of regional development strategies of the agropolitan region based on the area‘s functional activities which are translated into programs and annual activities of all sectors concerned. It has established seven distribution regions in Central Java province agropolitan namely (1) CANDIGARON agropolitan region (Temanggung), (2) WALISORBAN agropolitan region (Batang), (3) WALIKSARIMADU agropolitan region (Pemalang), (4) BUNGA KONDANG agropolitan region (Purbalingga), (5) ROJONOTO agropolitan region (Wonosobo), (6) SUTHOMADANSIH agropolitan region (Karanganyar), and (7) MERAPI MERBABU agropolitan region (Magelang regency). The agropolitan of Merapi Merbabu, Magelang, Central Java, has since 2003 included seven sub-districts including District Sawangan, Pakis, Candimulyo, Ngablak, Grabag, Dukun, and Tegalrejo, with a total area of 32,502 ha. The use of wet land area covers 6783 ha, building area (5986 ha), gardens (20,307 ha), pasture (2 ha), wood plant (1,000 ha), state forest (4122 ha), plantation (91 ha), and pond areas (29 ha). The applied irrigation includes technical, semi technical, and rainwater irrigation. Agricultural commodities in the area, are cabbages, tomatoes, carrots, scallion, chili, potatoes, and beans. The facilities support in Merapi Merbabu Agropolitan include: (1) Road network, (2) marketing support including stores and kiosks, transportation facility; banking facility and cooperatives, i.e. state-owned banks, BRI village units, BPD, and market bank/BKKLKM and agricultural cooperatives. Human resources in the form of institutions developed in the region based on absorption 117 ability of agropolitan farmer groups include beginners, advanced group, middle and main group. There are also production farming groups, farmer associations, and farmer cooperatives. OBJECTIVE The study aims to explore the potential of agricultural commodities in the region of Merapi Merbabu agropolitan Magelang. Analytical methods to search for leading commodities of agriculture in the agropolitan region using Location Question method (LQ), compiled from Handewi PS and Rachman, Assistance Team BPTP (2003), which is the ratio between the relative shares of production of a commodity i at the district level to the total production districts with the relative share of production of commodity i at the district level to the total district production. Pi/Pt LQ = ------- Ni/Nt Description: Pi = production of commodity i at the district level Pt = total production of commodity i at the district level Ni = production of commodity i at agropolitan area Nt = total production of commodity i at agropolitan area Criteria: LQ> 1: sector basis, meaning that commodity i in a region has a comparative advantage LQ = 1: a question whether the sector, meaning that commodity i in a region does not have an advantage, its production is only sufficient to meet the needs of their own territory. LQ <1: a question whether the sector, meaning that commodity i in a region cannot meet their own needs so that the necessary supplies come from outside. The comprehensive potential of commodities is considered opinion stakeholders in the development of commodities analyzed using comparative methods exponential (MPE). Analysis of the MPE alternative decisions to be selected, determine the criteria or comparison of the important decision criteria for evaluation, determine the importance of each criterion decision or consideration of the criteria, conduct evaluation of all alternatives on each criterion, calculate the score or the total value of each alternative and determine the priority order decision is based on the score or the total value of each alternative. ¿ = = m i j TKKj ij i RK TN total ) ( ) ( Description: TNi = total value of the i-th alternative RKij = degrees relative importance of criteria to the decision on the option-j i TKKj = degree of importance to the decision criteria-j; TKKj> 0; n = number of decision options m = number of decision criteria 118 Criteria of importance rate determination using a source of expert system knowledge through the organization of the various libraries and interviews with agropolitan experts closely related to development. RESULTS AND DISCUSSION Agopolitan Commodity Potency In 2003, local government of Magelang District, established a vegetable production center in the east slopes of Merapi Merbabu as agropolitan area. Figure 1 shows the position of sub-districts included in Merapi Merbabu as agropolitan area. According LQ analysis, there are various potential leading commodity sub-sectors of food crops, horticulture, vegetables, fruit, and plantations. The agropolitan include Sub District Sawangan, Pakis, Candimulyo, Ngablak, Grabag, Dukun, and Tegalrejo. The development of an agribusiness-based potential area is a regional development strategy. Thus each region in Indonesia should pay attention to the agricultural potential produced by a region. It is because the government has established the agricultural sector as the driving force of economic growth because Indonesia is classified as an agricultural country. 119 FIGURE 2. REGIONS OF AGROPOLITAN, MAGELANG Potential of Vegetables Commodities Magelang regency produces a variety of vegetables, which is the significant production namely red chillies, tomatoes and carrots. In addition to these three vegetables, this region also produces other vegetable crops but it is still subsistence, only for their own local needs. Vegetables, especially for the three types of vegetables on top, fits development in the District of Dukun, Srumbung, Pakis, Sawangan, and Ngablak. The analysis result determination in the district of vegetable at agropolitan region is shown in Table 1. TABLE 1. LQ VALUES OF VEGETABLES COMMODITIES PRODUCTION IN AGROPOLITAN AREA, MAGELANG Commodities LQ Tegalrejo: The leading commodity: maize, cassava, peanuts, long beans, red pepper, avocado, lansium, durian, guava, pineapple, banana, cotton plant , sugar cane, coconut, cardamom. Grabag: The leading commodity: maize, cassava, red chilly, long beans, avocado, lansium, durian, banana, papaya, vanilla, cloves, coffee, coconut, cardamom Ngablak: The leading commodity: maize, cassava, sweet potatoes vines, cabbage, mustard greens, carrots, oranges, bananas, clove, coffee, tobacco There Agribusiness SUB TERMINAL Pakis: The leading commodity: maize, cassava, cabbage carrots, potatoes, banana, papaya, clove, tobacco Sawangan: The leading commodity: rice, corn, potatoes, cucumbers, eggplant, red peppers, green beans, tomatoes, avocado, guava, pineapple, watermelon, kapok, sugar cane, tobacco Dukun: The leading commodity: rice, cassava, sweet potatoes vines, onion leaves, mustard greens, long beans, cucumber, eggplant, green beans, red peppers, tomatoes, avocado, citrus, mango, guava, pineapple, papaya, watermelon, coconut There Agribusiness SUB TERMINAL Candimulyo The leading commodity: collards, string beans, green beans, red peppers, tomatoes, corn, cassava, sweet potatoes vines, peanuts, lansium, mango, durian, banana, papaya, snake fruit, cotton plant, sugar cane, coconut 120 Leek 0,896 Onion 0,515 Garlic 0,000 Potatoes 0,853 Cabbage 1,147 Sawi 1,072 Carrots 1,246 Longbean 0,607 Cucumber 0,628 Squash 1,246 Water spinach 0,000 Spinach 1,246 Eggplant 0,675 Bean 1,173 Pepper 0,792 Tomatoes 0,994 Productivity of vegetable crops in the agropolitan region is high enough, but the quality achieved is not optimal, partly because of the lack of proper post-harvest management and cropping systems do still not consider food security. The level of pesticide use in vegetable farming in agropolitan area become a concern to control and this was followed up by the Center for Agricultural and Forestry Extension for the guidance of farmers. Potential of Fruit Commodities Magelang regency is one of the producers of the important fruits in Central Java. This region excels in production of salak plants and rambutan. Rambutan production in this area is the largest in Central Java. Three large fruit production is the salak, rambutan, and bananas. Clusters of fruits, especially the three types of fruit, grown in Srumbung, Pakis, and Ngablak. Results of analysis of fruit setting major commodities in the agropolitan region is , shown in Table 2. 121 TABLE 2. LQ VALUES OF FRUIT CROP PRODUCTION IN AGROPOLITAN AREA, MAGELANG Commodities LQ Avocado 1,974 Citrus 0,452 Duku 0,547 Sapodilla 1,122 Mangoes 0,349 Durian 0,445 Guava 0,771 Pineapple 0,815 Banana 1,184 Rambutan 0,198 Papaya 0,392 Salak 1,583 Melon 1,376 Watermelon 0,637 Fruit cultivation has not been inadequate because it is still garden plants that are not intensively cultivated. Salak Nglumut already has market access to regional and even international markets. Potential of Cash Crops For food crops, the largest crop produced is paddy. Magelang also produces a variety of crops such as cassava and corn, and various other crops. Cluster for food crops, especially rice, cassava, and corn was suitable in Grabag, Candimulyo, and Pakis. The analysis result determination of major cash crops in agropolitan area is shown in Table 3. TABLE 3. LQ VALUES OF CASH CROP PRODUCTION IN AGROPOLITAN AREA, MAGELANG Commodities LQ Paddy 0,822 Corn 1,474 Cassava 1,260 Sweet potato 2,203 Peanuts 1,177 Soybean 0,000 Cassava and sweet potato is widely grown in agropolitan area. But in terms of relative productivity it is not optimal and there is still a shortage of raw materials in cassava cropping industries and various snack foods made from raw cassava. This was because farmers have not intensive cultivation, especially with regard to plant spacing and fertilization which is not balanced, if farmers plant at harvest time and is not continuous. Generally farmers grow the cassava on dry or rain-fed land while waiting for the rainy season cropping. For a number of needs, all of the food industry in Magelang district in a year requires about 170,000 tons of raw materials, cassava. Agriculture Department data of Magelang regency mentions cassava production of various types starting in 2003 - 2007, in succession, every year at 55 517 tonnes, 102 605 tonnes, 45 522 tonnes, 71 089 tonnes and 75 857 tonnes. In 2007, the cassava food industry in Magelang regency still lacks about 100,000 tons of raw materials. Now, 122 farmers cultivate cassava and have quite good advantage. With the optimal production of 30 tons/ha, the current price level is approximately Rp 800/kg to Rp 24 million gross results. The cost to the farmer, is approximately USD 5 million, so the net revenues of farmers reached Rp. 19 million/ha, for a period of 12 months or two rice seasons. When compared with rice, each hectare of rice today net revenue is approximately Rp. 9 million. Corn is approximately Rp. 7 million/ha, for a six-month long effort. Potential of Plantation Crops Results of analysis of plantation establishment of leading commodities in the district area agropolitan are shown in Table 4. TABLE 4. LQ VALUES OF PLANTATION COMMODITIES PRODUCTION IN AGROPOLITAN AREA, MAGELANG Commodities LQ Vanilla 2,481 Kapok 0,968 Sugar cane 0,434 Cloves 1,317 Coffe 1,703 Tea 0,000 Tobacco 1,514 Coconut 1,090 Cardamom 1,510 Rheum officinale 0,000 Rating scale analysis of interviews results with the informants, namely the head BPPK (Agricultural and Forestry Extension at the district level), samples of farmers who participated in farmer groups, and the district and the Department of Agriculture; put the potential of existing is the most important aspect in the consideration of competitive commodities development program. The second criteria of importance is commodity markets potential, and then technology support, supporting industries, and human resources. The result of interviews with key informants found that each type of commodity has a different potential in the development process. Interviews with key informants found that each district had to meet different problems in agropolitan development process. This resulted in weighting certain criteria to be included in the determination of the main commodities. Model output analysis of areas of commodity groups potential such as the order or priority agropolitan commodity along with value calculations are included in Comparative Method Exponential . TABLE 5. ASSESSMENT OF POTENTIAL COMMODITIES GROUPS AT AGROPOLITAN AREA, MERAPI MERBABU MAGELANG No. Criteria Importance Rate Commodity groups Vegetables Cash crops Fruits Plantation 1. Existing Potential 9 8 7 7 5 2. Market potential 8 8 7 8 4 123 4. Technology support 6 5 5 4 3 4. Industry support 5 4 5 5 6 5. Human resource 7 8 7 7 4 The order of priority of selected groups of commodities are determined by finding the total value of commodities that are already inputted from largest to smallest value. The calculation result analysis of potential commodity groups can be seen in Table 6. TABLE 6. CALCULATION MODEL ANALYSIS OF COMMODITIES GROUP POTENTIAL AT AGROPOLITAN REGIONS MERBABU MERAPI, MAGELANG Priority Selected commodity groups MPE value Potential commodity groups 1 vegetables 153.108.745 Potential commodity groups 2 Fruits 57.962.558 Potential commodity groups 3 Cash crops 46.960.701 Potential commodity groups 4 plantation 2.043.550 From the analysis indicated in the table, it can be concluded that vegetable commodity is a commodity with the most potential in the eight districts of Magelang District agropolitan region. Fruit also has a high commodity potential, kaena currently has been able to penetrate export markets, among others salak nglumut. The Effect of Global Economic Crisis on Commodity Performance Is there any impact of the global economic crisis on agropolitan commodity performance? We can explain that impact of the global crisis on Indonesia's economy including: (1) First, the global crisis caused a disturbance of macroeconomic stability nationally. It begins with growth slowing, due to a fall in domestic demand because of foreign price increases and because of higher unemployment. This is closely related to increasing inflation which continues to rise, also the interest factor which resulted in decreased rates of real income in households due to the large costs associated with high interest; (2) Second, the impact of the global crisis was intrusive directly and indirectly on national industry. For companies that are in the industry sector, the increase in oil prices increased costs in the form of direct production costs of fuel usage. In addition, the price increased the cost of components (raw materials) imported and locally. This increase also automatically increased transportation cost in distribution channels; (3) Third, rising inflation and prices of industrial goods, as well as price increases fuel erode real incomes of households. This in turn is manifested in the form of reduced levels of domestic consumption and investment, that increasingly add to downward pressure on rates growth. The reduction of consumption and investment as a result of global crisis, should encourage domestic agricultural potential reigned in their own country. Marketing of agricultural commodities in an agropolitan region is still limited to domestic marketing, it seems not directly affected by the global crisis, both on the selling price and the quantity produced. Agricultural marketing system of agropolitan products are centralized through the sub terminal agribusiness, namely STA Sewukan located in the Dukun District and the STA Ngablak in the Ngablak District. Definition of Agribusiness Sub Terminal (STA) according to the Agency for Agribusiness Department of Agriculture (2000) is "the marketing infrastructure for physical transactions (auctions, subscriptions, spot markets) and non- physical (contracts, orders, futures market). 124 Sub-terminals serving the various needs of agricultural commodities and a meeting place for traders and buyers from various area; even STA Sewukan and Ngablak currently plays an important role as a supplier of vegetables to the area of Jakarta, Bogor, Depok, Tangerang, and Bekasi. Research Prihtanti and Soewadji (2009) found that Dukun sub- District can be positioned at the center of a growth agropolitan region. Dukun‘s position as a regional growth center of an agropolitan is shown in Figure 3. Other districts are in the agropolitan region, while this period is still in the position of producer of raw materials and production centers. CONCLUSIONS The main types of commodities in the Merapi Merbabu agropolitan area, i.e. four main types of crash crops (corn, sweet potato, cassava, peanuts); six kinds of vegetable commodities (mustard greens, cabbage, carrots, squash, bean); and five types of fruit (avocado, sapodilla, banana, dragon fruit, melon). Vegetables and fruits commodities have potential to penetrate more into national and international markets. Kecamatan Dukun Keterangan: Sentra Produksi Pengumpul Bahan Baku Penghasil Bahan Baku Pusat Regional/Pasar Batas Kawasan Agropolitan FIGURE 3. DUKUN POSITION AS THE CENTRAL DISTRICT OF GROWTH AT AGROPOLITAN REGIONS, MAGELANG 125 REFERENCES Andri, Kuntoro Boga. 2006 Rural Development Perspective. Inovasi http://io.ppi- jepang.org/article.php?id=153 On line ISSN : 0917-8376 | Edisi Vol.6/XVIII/Maret 2006 Anonim. 2009. Monography of. Magelang Region. Djakapermana, Ruchyat Deni. 2003. Agropolitan Area Development in the Framework of Regional Development Plan-Based National Spatial. Ministry of Settlements and Regional Infrastructure of the Republic of Indonesia. Hamenda, John. 2003. Peranan Investasi dalam mengembangkan Kawasan Agropolitan yang berbasis Komoditas. Lokakarya Perumusan Kebijakan Pengembangan Agropolitan dalam rangka Pemberdayaan Ekonomi Perdesaan melalui Kemitraan Masyarakat – Swasta – Pemerintah, yang diselenggarakan oleh Ditjen. Tata Perkotaan dan Tata Perdesaan pada tanggal 12-13 Agustus 2003 di Jakarta. Handewi P.S.R. 2003. Determination Basic Commodities in the National Provincial. Synchronization workshop papers Research Program Petknologi Agriculture. Social Research in Agricultural Economics. Bogor. Marimin. 2004. Technique and Decision Aplication Plural Criteria. Grasindo. Jakarta. Prihtanti, and Yahmini Soewadji. 2009. Determination of Growth Center Agropolitan Regions. Limited published research reports. Satya Wacana Christian University. Rusastra, Hendiarto, Khairina M. Noekman, Ade Supriatna, Wahyuning K Sejati, Deri Hidayat. 2005. Performance and Perspective of Agropolitan Models in supporting The Agribusiness-Based Regional Economic Development. SOCA (Socio-Economic of Agriculture and Agribusiness) Volume 5 No. 2 July 2005. Statistic Bereau. 2007. Kabupaten Magelang dalam Angka. BPS Magelang. Susilawati, M. Sabran, Rahmadi Ramli, Bambang Ngaji Utomo, Andy Bhermana dan Amik Krismawati. 2006. National Leading Commodities at Kalimantan Tengah Province wiyh Location Quetion Method. Journal of Pengkajian dan Pengembangan Teknologi Pertanian Vol. 9, No1, Maret 2006: 1 - 9 Wibowo, R., 1997, Strategi Industrialisasi Pertanian dan Pengembangan Agribisnis Komoditas Unggulan, paper presented on training of location spesific system with adaptive technology approach, BPPFP Ciawi-Bogor, 14 Maret -12 April 1997. 126 THE CONTRIBUTION OF AGRICULTURAL SUB-SECTOR TO INDONESIAN ECONOMY AFTER ECONOMIC CRISIS Lukytawati Anggraeni 1)* , Tony Irawan 1) , Ahmad Heri Firdaus 1) and Amzul Rifin 2) * 1) Department of Economics, Faculty of Economics and Management, IPB 2) Department of Agribusiness, Faculty of Economics and Management, IPB Institut Pertanian Bogor. Kampus IPB Darmaga. Bogor 16680.
[email protected] ABSTRACT The main objective of this paper is to analyze agricultural sub-sectors contribution to the Indonesian economy by using Input-Output analysis. The important findings of the study: 1) the food crops sub-sector has the highest contribution in output and value added; 2) In terms of linkages with the other sectors, the paddy sub-sector has the highest backward and forward linkages; and 3) In terms of the multiplier, poultry has the highest output and income multiplier with a negative change during the research period. This result suggests that revitalization of the agricultural sector in the future must not only concentrate in developing the food crops sector. Development of the livestock sector, especially poultry sub- sector, needs further attention since it has higher potential to affect other sectors of the economy compared to the other agriculture sub- sector. Keywords: Input-Output, Linkage analysis, Multiplier INTRODUCTION Agriculture plays an important role in economies of the developing countries. There are several roles of agriculture in economic development: 1) it provides food for the people, 2) it is a source of labor for other industries, 3) it is a source of capital for modern economic growth especially in the early stages of development, 4) it is a source of foreign currency, and 5) the rural population is an important market for the output in the modern urban sectors (Gillis et.al., 1992) During the economic recession in 1997-1998, the agricultural sector proved to perform as the buffer to the crisis. The contribution of the agricultural sector to Gross Domestic Product (GDP) and employment increased. Depreciation of the rupiah by 500-700 percent had increased competitiveness of Indonesian tree crops products that were mostly produced using domestic resources. This sector was able to absorb increased unemployment from the modern sector. The contribution to labor absorption slightly increased from 40 percent in 1997 to 40.8 percent in 1998 (Anggraeni, 2001). Although the highest poverty incidence occurred in the agricultural sector, the poverty rate decreased during the economic crisis from 68.5 percent in 1996 into 58.4 percent in 1999 (Susenas, 1996 and 1999). After recovery from the economic crisis, increased income from export- oriented agricultural products could no longer be the buffer of the crisis due to an increased inflation rate that increased both production and living costs (Sunderlin et al., 2000). The agricultural sector contribution began to decrease again after the economic crisis recovery. In 2006-2007, the contribution slightly increased mainly due to the increase of several prices of Indonesian agricultural exports (Figure 1). FIGURE 1. AGRICULTURE SHARE OF GDP AND EMPLOYMENT 127 Source: Asian Development Bank (2008) Although the contribution to GDP has decreased over the years the number of people working in agricultural sector is still high. In 2007, 42.6 million or 43.7 percent of the total labor force still depend on the agricultural sector (Figure 1). The main objective of this paper is to analyze the role of the agricultural sub-sector on the Indonesian economy after an economic crisis. In this study, the agricultural sector contribution to output and value added is analyzed further. The role of the agricultural sector to the Indonesian economy is also analyzed by determining its linkages with other sectors (backward and forward) and the multiplier effect (output and income). Data and Methodology Data The data utilized for the research is the Input-output table of 2000 and 2005 issued by the Central Bureau of Statistics of Indonesia. The raw data consists of 175 sectors and for the purpose of this research the sectors is aggregated into 24 major sectors. In this paper, the agricultural sector is divided into 15 sectors (Appendix 1). Methodology The methodology employed in this paper is input output analysis. The input output analysis was developed by Wassily Leontief in the late 1920s and early 1930s (Blair and Miller, 1985; Miller, 1997). In order to analyze this topic using input output analysis, an input output table or account is utilized. The input output table or account indicates the interconnection of the economy by recording, for a given period (usually one year), the economic transactions that occur in the economy (Miller, 1997). In the input output table or account the rows describe the distribution of producer‘s output in the economy; meanwhile the columns describe the composition of inputs required by a particular industry to produce its output. The input output table or account basically indicates the equilibrium between demand and supply in the following equation (Blair and Miller, 1985; Miller, 1997): X i =A i + F i …………………………………..………………………... (1) where: X i = production of sector i 128 A i = intermediate demand of sector i F i = final demand of sector i In matrix notation, equation (1) can be written as follows: AX + F = X …………………………………………………………... (2) where A = intermediate input coefficient matrix X = output vector of all sectors F = final demand vector Equation (2) can be transformed to the following equation: X = [1-A] -1 F …………………………………………………………... (3) where [1-A] -1 = Leontief inverse matrix The 2000 and 2005 input output table published by Statistics Indonesia is utilized to analyze the contribution of the palm oil sector and palm oil processing to total output, value added and employment. Meanwhile, the 2005 input output table is utilized to analyze the linkage and multiplier analysis. A 33 sector input output table is constructed for the analysis. Linkage Analysis In the input output analysis, production in a particular sector has two kinds of economic effects on the other sectors of the economy: Backward Linkage If sector j increases its output, it will increase the demand from sector j (as a purchaser) on the sector where its products are used as inputs to production in sector j. A measure of the backward linkage is given by the sum of the elements in the j-th column of the technical coefficient matrix, A, it is also called the direct backward linkage (Miller, 1997) In order to include the indirect effect; the total backward linkage is calculated. The total backward linkage utilizes the column sums of (I-A)-1 not just A (Miller, 1997). In order to make comparisons between sectors, a normalization procedure is carried out by dividing each backward linkage by the average backward linkage (Miller, 1997). Forward Linkage If sector j increases its output it also means additional amounts of product j that are available to be used as inputs in other sectors for the sector‘s production. The direct forward linkage of sector i is defined as the sum of the elements in the i th row of the direct-output coefficient matrix, D. In order to include the indirect effect, the total forward linkage is calculated. In order to make comparisons between sectors, a normalization procedure is carried out by dividing each forward linkage by the average forward linkage (Miller, 1997). Multiplier Analysis One of the major uses of input output analysis is assessing the effect to the economy from the changes in exogenous elements The term ―impact analysis‖ is used when the exogenous changes occur because of the actions of only one impacting agent and the change occurs during the short run period. The analysis is derived from the Leontief inverse which is also known as the multiplier. There are three most frequently used multipliers (Miller and Blair, 1985): Output multiplier An output multiplier for sector j is the total value of production in all sectors of the economy needed to satisfy the final demand for sector j‘s output Income multiplier An Income multiplier analyzes the impact of changes in final demand spending into changes in income received by households. Discussion 129 The role of the agricultural sector to GDP continues to decline after an economic crisis. The value of agriculture GDP from 2000 to 2005 increased by 74 percent, but its share decreased from 10 percent to only 8.5 percent (Table 1). The food crop sector has the highest contribution to agricultural GDP. In terms of growth, the estate sector grew more than 100 percent between 2000 and 2005 which was caused by the booming of several estate crops such as palm oil, coffee, cacao, rubber etc. Meanwhile the forestry sector has the lowest growth with only 35 percent mainly caused by the decrease of forest area (Table 1). The food crop sector has the highest contribution to the agricultural GDP. In terms of growth, the estate sector grew more than 100 percent between 2000 and 2005 which was caused by the booming of several estate crops such as palm oil, coffee, cacao, rubber etc. Meanwhile the forestry sector has the lowest growth with only 35 percent mainly caused by the decrease of forest area in the country (Table 1). TABLE 1. THE ROLE OF AGRICULTURAL SUB-SECTOR AND OTHER SECTORS IN OUTPUT CREATION Sector 2000 2005 Output (Bil Rp) Share (%) Output (Bil Rp) Share (%) Sector Total Sector Total Food Crops 127,145 46.31 4.71 227,825 47.20 4.01 Estate Crops 41,923 15.27 1.55 86,710 17.96 1.52 Livestock 46,546 16.95 1.72 68,308 14.15 1.20 Forestry 20,039 7.30 0.74 27,100 5.61 0.48 Fishery 38,881 14.16 1.44 72,761 15.07 1.28 Agriculture 274,534 10.16 482,704 8.49 Food Industry 329,325 12.19 548,333 9.64 Mining 196,815 7.29 387,251 6.81 Manufacturing 749,850 27.76 1,579,811 27.77 Construction & Infrastructure 258,315 9.56 667,335 11.73 Services 892,259 33.03 2,022,840 35.56 Total 2,701,010 100.00 5,688,274 100.00 Source: Statistics Indonesia 2002 and 2007 During the period of 2000-2005, all sectors value added increased. In terms of contribution to value added, only the share of the secondary and tertiary increased. In contrast, the share of all the primary sectors (agriculture and mining, and the food industry) declined (Table 2). All agriculture sub-sectors share to value added decreased during 2000- 2005, where food crops and the fishery sub-sector experienced the highest and the lowest share changes respectively. TABLE 2. THE ROLE OF AGRICULTURAL SUB-SECTOR IN VALUE ADDED CREATION Sector 2000 2005 Value Added (Bil Rp) Share (%) Value Added (Bil Rp) Share (%) Sector Total Sector Total Food Crops 110,707 52.24 8.10 183,111 49.61 6.36 130 Estate Crops 31,106 14.68 2.28 60,276 16.33 2.10 Livestock 24,396 11.51 1.79 43,678 11.83 1.52 Forestry 15,983 7.54 1.17 22,545 6.11 0.78 Fishery 29,713 14.02 2.17 59,485 16.12 2.07 Agriculture 211,904 15.51 369,095 12.83 Food Industry 112,063 8.20 192,601 6.69 Mining 167,692 12.27 317,170 11.02 Manufacturing 273,535 20.02 603,080 20.96 Construction & Infrastructure 84,967 6.22 233,773 8.13 Services 516,339 37.79 1,161,173 40.36 Total 1,366,500 100.00 2,876,892 100.00 Source: Statistics Indonesia 2002 and 2007 Linkage Analysis In line with the study of Rifin and Anggraeni (2010), all the agricultural sub-sector has backward linkage compare to the other sectors of the economy (Table 3). In 2000, three sub-sectors with the highest backward linkages are paddy, fishery, and other tree crops. Meanwhile, in 2005, the sub-sectors of paddy, maize, and other tree crops had the highest backward linkage. This shows that the increase in output in this sector has the biggest effect on the other sectors especially which where it provides input to the sector. The lowest sub- sector is the fiber plants, which indicates that the increase in output in this sector has the lowest benefit to the other sectors which provide input to fiber plants sector. TABLE 3. BACKWARD LINKAGE IN 2000 AND 2005 No Sektor 2000 2005 Changes 2000-2005 1 Paddy 0.53275 0.66953 0.14 2 Maize 0.07083 0.22452 0.15 3 Root and tuber crop 0.03644 0.10927 0.07 4 Vegetables and fruits 0.05597 0.10354 0.05 5 Other food crops 0.05005 0.07008 0.02 6 Oil palm 0.10438 0.06112 -0.04 7 Fiber plants 0.00135 0.00039 0.00 8 Cacao 0.00741 0.03202 0.02 9 Other tree crops 0.21051 0.15349 -0.06 10 Livestock and Milk 0.03823 0.03479 0.00 11 Poultry 0.08791 0.05176 -0.04 12 Other Livestock 0.00435 0.00435 0.00 13 Forestry 0.12386 0.07896 -0.04 14 Fishery 0.216502 0.06903 -0.15 15 Agricultural services 0.02529 0.01329 -0.01 131 16 Mining 0.10897 0.11503 0.01 17 Food, drink, and tobacco 4.79142 4.79341 0.00 18 Textile, Cloth, & Shoes 1.67861 1.34577 -0.33 19 Bamboo, Rotan, and paper 1.01061 0.79057 -0.22 20 Other industrial sector 1.48100 1.49031 0.01 21 Electricity, Gas, and Water 0.14922 0.18847 0.04 22 Building 0.54301 0.76436 0.22 23 Trade, Hotel, and Restaurant 0.91246 1.14826 0.24 24 Services 0.75514 0.87208 0.12 Comparing backward linkages during 2000-2005, the food crop sector (paddy, corn, and root and tubber root) had the highest positives changes of backward linkage. Meanwhile, three sub-sectors with the highest negative backward linkage changes are fishery, other tree crops, poultry and forestry. In terms of forward linkage, the agricultural sub-sectors also has low forward linkage compare to other sector of the economy (Table 4). In 2000 and 2005, three sub-sectors with the highest forward linkage are paddy, agricultural services, and other tree crops. This indicates that products from those sub-sectors are more utilized by other sectors of the economy compared to the other agricultural sub-sector. In 2000 and 2005, cacao and other livestock are an agriculture sub-sector with the lowest forward linkage which means that the output of those sectors are mainly consumed directly by households or exported. Comparing forward linkage in 2000 and 2005, 30 percent of agricultural sub-sectors had a positive change. The sub-sector with the highest positive change is root and tuber plants. Meanwhile, agricultural services had the highest negative change. Although the paddy sub-sector had the highest forward linkage in the two periods, but together with the forestry sub-sector it had the highest forward linkage decrease. TABLE 4. FORWARD LINKAGE IN 2000 AND 2005 No Sub sector 2000 2005 Changes 1 Paddy 0.27 0.21 -0.06 2 Maize 0.07 0.08 0.01 3 Root and tuber plants 0.03 0.06 0.03 4 Vegetables and fruits 0.04 0.06 0.02 5 Other food crops 0.10 0.09 -0.01 6 Oil palm 0.03 0.05 0.02 7 Fiber plants 0.06 0.04 -0.02 8 Cacao 0.01 0.03 0.02 9 Other tree crops 0.19 0.14 -0.05 10 Livestock and milk 0.12 0.09 -0.03 11 Poultry 0.09 0.05 -0.03 12 Other Livestock 0.01 0.00 0.00 13 Forestry 0.15 0.09 -0.06 14 Fishery 0.06 0.07 0.01 15 Agricultural services 0.30 0.17 -0.13 16 Mining 0.94 0.45 -0.49 132 17 Food, drink, and tobacco 1.11 0.77 -0.34 18 Textile, clothes, and shoes 0.34 0.30 -0.04 19 Bamboo, rotan, and paper 0.36 0.32 -0.04 20 Other industrial sector 1.83 2.04 0.21 21 Electricity, Gas, and Water 0.17 0.22 0.05 22 Building 0.23 0.20 -0.03 23 Trade, Hotel, and Restaurant 1.15 0.66 -0.49 24 Services 1.03 1.17 0.14 Multiplier Analysis In this study, the multiplier analysis consists of two types; output and income . In the output multiplier, livestock has the highest output multiplier in both periods with value of 1.89 and 1.62 in 2000 and 2005. It means that an increase in Rp 1 million of final demand in the livestock sub-sector will increase the output of all sectors by Rp 1.89 million (Table 5). Meanwhile, root and tuber plants has the lowest output multiplier in both periods compared to other agricultural sub-sector. TABLE 5. OUTPUT MULTIPLIER IN 2000 AND 2005 Sector 2000 2005 Changes Type I Type II Type I Type II Type I Type II Paddy 1.1625 1.4051 1.3718 1.7468 0.2093 0.3417 Maize 1.1496 1.3678 1.3388 1.6558 0.1892 0.2880 Root and tuber plants 1.0551 1.2306 1.1747 1.4339 0.1196 0.2033 Vegetables and fruits 1.0856 1.4421 1.1758 1.5475 0.0902 0.1054 Other food crops 1.2017 1.4421 1.2903 1.6392 0.0886 0.1971 Oil palm 1.4326 1.9878 1.5427 2.1009 0.1101 0.1131 Fiber plants 1.1374 1.4709 1.2572 1.6672 0.1198 0.1963 Cacao 1.2163 1.5411 1.3115 1.6882 0.0952 0.1471 Other tree crops 1.3183 1.9147 1.3953 1.9613 0.0770 0.0466 Livestock and milk 1.3912 1.0035 1.3554 1.8199 -0.0358 0.8164 Poultry 1.8874 2.6244 1.6215 2.2374 -0.2659 -0.3870 Other Livestock 1.3332 2.0728 1.2558 1.888 -0.0774 -0.1848 Forestry 1.2518 1.6039 1.2516 1.6877 -0.0002 0.0838 Fishery 1.2961 1.6363 1.2724 1.6661 -0.0237 0.0298 Agricultural services 1.254 1.7535 1.2764 1.8072 0.0224 0.0537 Mining 1.1445 1.3994 1.2579 1.5779 0.1134 0.1785 Food, drink, and tobacco 1.9994 2.496 2.0169 2.5147 0.0175 0.0187 Textile, clothes, and shoes 2.1643 2.7676 2.1437 2.7085 -0.0206 -0.0591 Bamboo, rotan, and paper 2.0637 2.5892 2.017 2.5593 -0.0467 -0.0299 Other industrial sector 1.9199 2.3803 1.9809 2.5067 0.0610 0.1264 Electricity, Gas, and Water 2.2223 2.7003 2.3797 2.9698 0.1574 0.2695 Building 2.0724 2.7303 2.0283 2.605 -0.0441 -0.1253 Trade, Hotel, & Restaurant 1.6771 2.2239 1.6195 2.1795 -0.0576 -0.0444 Services 1.6341 2.3433 1.644 2.316 0.0099 -0.0273 133 Comparing the output multiplier in 2000 and 2005, change of output multiplier in agricultural sub-sector varies from -0.27 to 0.21. Ten of the fifteen agricultural sub-sectors had a positive output multiplier change. The paddy sub-sector had the highest positive output multiplier change. In contrast, the poultry sub-sector had the highest negative output multiplier change. TABLE 6. INCOME MULTIPLIER IN 2000 AND 2005 Sector 2000 2005 Changes Type I Type II Type I Type II Type I Type II Paddy 1.2508 1.6382 1.4596 1.9233 0.2088 0.2851 Maize 1.2429 1.6279 1.4945 1.9694 0.2516 0.3415 Root and tuber plants 1.0952 1.4344 1.2464 1.6423 0.1512 0.2079 Vegetables and fruits 1.0873 1.4241 1.1714 1.5436 0.0841 0.1195 Other food crops 1.2043 1.6821 1.3309 1.7538 0.1266 0.0717 Oil palm 1.3434 1.7595 1.4799 1.9501 0.1365 0.1906 Fiber plants 1.1459 1.5008 1.2398 1.6336 0.0939 0.1328 Cacao 1.2365 1.6195 1.3178 1.7365 0.0813 0.1170 Other tree crops 1.2232 1.6021 1.3003 1.7134 0.0771 0.1113 Livestock and milk 1.3475 1.765 1.2753 1.6805 -0.0722 -0.0845 Poultry 1.4713 1.9271 1.3657 1.7996 -0.1056 -0.1275 Other Livestock 1.1491 1.5051 1.1315 1.491 -0.0176 -0.0141 Forestry 1.3089 1.7143 1.235 1.6274 -0.0739 -0.0869 Fishery 1.336 1.7499 1.2534 1.6516 -0.0826 -0.0983 Agricultural services 1.1691 1.5312 1.1903 1.5685 0.0212 0.0373 Mining 1.1832 1.5497 1.3118 1.7285 0.1286 0.1788 Food, drink, and tobacco 2.323 3.0426 2.5571 3.3695 0.2341 0.3269 Textile, clothes, and shoes 2.2519 2.9494 2.3649 3.1162 0.1130 0.1668 Bamboo, rotan, and paper 2.3819 3.1198 2.3019 3.0333 -0.0800 -0.0865 Other industrial sector 2.1586 2.8272 2.1492 2.832 -0.0094 0.0048 Electricity, Gas, and Water 2.664 3.4892 2.7621 3.6396 0.0981 0.1504 Building 1.8394 2.4092 2.1038 2.7722 0.2644 0.3630 Trade, Hotel, & Restaurant 1.6845 2.2063 1.5791 2.0808 -0.1054 -0.1255 Services 1.4237 1.8647 1.4639 1.929 0.0402 0.0643 On the income multiplier, the poultry sub-sector had the highest income multiplier in 2000 of 1.47 which means that an increase of Rp 1 million in final demand of the poultry sub-sector will increase income in all sectors by Rp 1,47 million. In 2005, oil palm had the highest income multiplier (Table 6). Meanwhile, the sub-sector with the lowest income multiplier was vegetables and fruits in 2000 and other livestock in 2005. Comparing income multipliers in 2000 and 2005, the change of the income multiplier varies from -0.7 to 0.25. Food crops had a higher positive income multiplier change compared to other sectors. Maize had the highest positive change, meanwhile poultry had the highest negative change. Biplot Analysis 134 Biplot analysis determines the cluster of the agricultural sub-sector by using value of forward and backward linkages and multiplier output and income. Figure 2 shows that the agricultural sector can be divided into two cluster: 1. Low Forward and backward linkages and a low multiplier of output and income; and 2. Low Forward and backward linkages and a high multiplier output and income. In 2000, almost all agricultural sub-sectors belong to cluster 1. Most of agricultural sub-sector had low forward and backward linkages and multipliers compared to other sectors in the Indonesian economy. Only the poultry sub-sector belongs to cluster 2. Biplot analysis of 2005 shows that all agricultural sub-sectors belong to cluster 1. A similar cluster pattern means that the agricultural sector remained relatively unchanged over these five years. FIGURE 2. BIPLOT ANALYSIS OF 2000 AND 2005 om1 ikd ikb ikb im1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 - 1 . 5 - 1 - . 5 0 . 5 1 1 . 5 D i m e n s i o n 2 -2 -1.5 -1 -.5 0 .5 1 Dimension 1 Variables Observations Biplot om1 ikd ikb ikb im1 1 2 3 4 5 6 7 8 910 11 12 13 14 15 16 17 18 19 20 21 22 23 24 - 1 . 5 - 1 - . 5 0 . 5 1 1 . 5 D i m e n s i o n 2 -2 -1.5 -1 -.5 0 .5 1 Dimension 1 Variables Observations Biplot Conclusions The contribution of the agriculture sector to the Indonesian economy has declined over the years. Looking at the agriculture sub-sector, the food crops sector has the highest contribution to output and value added. Food crops (paddy) also has the highest forward and backward linkages since it is the main crop which will be utilized in the other sectors especially in the food or manufacturing industry. Meanwhile, the poultry sub-sector has the highest output and income multiplier. Therefore in the future the government revitalization of agriculture program must not only concentrate in developing the food crops sector. Development of the livestock sector, especially the poultry sub-sector, needs further attention since it has high potential to affect other sectors of the economy compared to the other agriculture sub- sectors. 135 REFERENCES Anggraeni, Lukytawati. The Role of Smallholder Tree Crops to Poverty Alleviation and Regional Development : Case in Indragiri Hilir District-Riau Province. Thesis. Bogor Agricultural University. Bogor. Asian Development Bank. 2009. Key Indicators for Asia and Pacific 2008. Asian Development Bank. http://www.adb.org/Documents/Books/Key_Indicators/2008/ Country.asp Gillis, Malcom, Dwight H Perkins, Michael Roemer and Donald R Snodgrass. 1992. Economics of Development. Third Edition. W W Norton & Company. New York. Miller, Ronald E (1997). Regional and Interregional Input-Output Analysis. In Methods of Interregional and Regional Analysis, Walter Isard (ed.), Brookfield USA: Ashgate. Miller, Ronald E and Peter D Blair 1985. Input Output Analysis: Foundations and Extensions. Englewood Cliffs, New Jersey: Prentice Hall. Rifin, Amzul and Lukytawati Anggraeni. The Role of Agricultural Sub Sector to Indonesia Economy. 2010. Journal of Socio-Economic of Agricultural and Agribusiness Vol 10 (1), pp : 40-45. Statistics Indonesia. 2002. Indonesia Input-Output Table 2000. Jakarta: Statistics Indonesia. ----------------------------- 2007. Indonesia Input-Output Table 2005. Jakarta: Statistics Indonesia. United Nations. Commodity Trade Statistics Database (COMTRADE). http://unstats.un.org/unsd/comtrade/ 136 WHAT DETERMINES THE PRICE OF COOKING OIL IN INDONESIA? Amzul Rifin Department of Agribusiness, Faculty of Economics and Management, Bogor Agricultural University, Campus IPB Dramaga, Jl Kamper, Wing 4 Level 4, Bogor, West Java Indonesia 16680 Phone/Fax: 62 251 8629654 Email:
[email protected] ABSTRACT Cooking oil in Indonesia is considered to be one of the staple foods of Indonesian people. During the crisis in 2007-2008 the CPO domestic price increased significantly. One of the reasons is the increase of Crude Palm Oil (CPO) price in the international market. The objective of this research is to investigate the impacts of the international price of CPO on the domestic price of CPO and cooking oil. The result indicates that CPO international price influenced directly the CPO domestic price and indirectly influenced the cooking oil price through CPO domestic price. Keywords: crude palm oil, vector error correction, impulse response INTRODUCTION Palm oil is considered to be an essential product in Indonesia. Besides being one of the major exporting commodities from Indonesia, palm oil is also the main raw material for cooking oil. Palm oil usage for cooking oil is the largest with 76.75 percent followed by oleochemicals (9.62 percent) and soaps and detergents (7.12 percent) (Munadi, 2007). In Indonesia, cooking oil is one of the staple foods of the Indonesian people. Therefore the price of cooking oil is controlled by the government. Recently, the price of cooking oil has risen dramatically. In anticipating the rise, the government has taken several policies. One of the policies is to increase the export tax of crude palm oil (CPO), in order to maintain the availability of CPO for the domestic market especially for producing cooking oil. The government issued Ministry of Finance Decree No 09/PMK.011/2008 which imposes a higher export tax rate when the international price of CPO increases. The government also issued Ministry of Finance Decree No 118/PMK.011/2007, No 14/PMK.011/2008 and No 15/PMK.011/2008 concerning the value added tax on cooking oil. The decrees indicated that the government will pay the value added tax on both packaged and non packaged cooking oil sold domestically. By paying the value added tax, the price of cooking oil is expected to decrease by 10 percent, which is the same amount as the value added tax. During the global crisis in 2008 when the international price of CPO rose substantially, the price of cooking oil also rose substantially and reached Rp 12,444/kg in March 2008 despite several policies that the government had implemented. Cooking oil producers blamed the rise 137 of cooking oil price on the high price of CPO in the international market. On March 2008, the price of international CPO reached a peak at US$ 1146.86/ton meanwhile the domestic CPO price reached Rp 9,733.6/kg. There are several studies concerning the price linkage between the same commodities in the foreign and domestic markets. There are only a few studies concerning price linkage between different but related products. Baffes and Ajwad (2001), Baffes and Gohou (2005) and Pan, Mohanty and Fadiga (2007) studied the price linkages between cotton and polyester prices. The objective of this research is to investigate what determines the price of cooking oil especially the effect of domestic and international prices of CPO using a vector error correction (VEC) model approach. Three specific objectives are included: 1. To test whether the international price of CPO and the domestic price of CPO and cooking oil are related through cointegration tests using a vector error correction (VEC) model framework. 2. To test the causal relationships between the international price of CPO and the domestic price of CPO and cooking oil. 3. To analyze how the domestic price of CPO and cooking oil respond to a change in the international price of CPO by estimating impulse response. The remainder of this paper proceeds as follows, the next section discusses the research methodologies used in this research. The second part discusses the literature review related to this paper. The next part describes the data used in this research, followed by the cointegration tests, Granger-Causality tests and impulse response functions. Finally, implications of the model on the domestic price of CPO and cooking are discussed. RESEARCH METHODOLOGY The methodology used in this research is based on cointegration analysis of time series data. In this study, econometric analyses were conducted through four steps. First, unit root test is performed on each series to assess the stationarity of each variable. Second, the Johansen methodology is conducted to test the cointegration relationships between the variables. Third, Granger causality test is performed on possible causal relationships between each series. Finally, we estimated the impulse response functions of domestic prices for a change in international price of CPO. Unit Root Tests Unit root test, applying the Augmented Dickey Fuller (ADF), was used to test whether the variables were stationary or not. The test is performed by ―augmenting‖ the preceding three equations by adding the lagged values of the dependent variable AY t (Gujarati, 2003). The ADF test consists of estimating the following regression: ¿ = ÷ ÷ + A + + + = A m i t i t i t t Y Y t Y 1 1 2 1 c o o | | ……………………...……………………(1) where ε t is a pure white noise error term and where AY t-1 = (Y t-1 -Y t-2 ). The number of lagged difference terms to include is often determined empirically, the idea being to include enough terms in order for the error term in the equation is serially uncorrelated. In ADF, δ=0 is 138 tested and the ADF test follows the same asymptotic distribution as the DF statistic, so the same critical values can be used (Gujarati, 2003). Cointegration Tests If the variables are considered to be a non stationary variables, the next step is to check whether the variables are cointegrated. When variables are cointegrated it means that the variables have long term relationship between them. One of the methods to test cointegration is the Johansen method (Enders, 1995). Consider a vector autoregression (VAR) of order p t t p t p t t BX Y A Y A Y c + + + + = ÷ ÷ ... 1 1 …………………...…………………………… (2) where Y t is a k vector of non-stationary I(1) variables, X t is a d vector of deterministic variables, and ε t is a vector of innovations. The VAR equation above can be written as, ¿ ÷ = ÷ ÷ + + A I + H = A 1 1 1 p i t t i t i t t BX Y Y Y c ………………………………………………. (3) where ¿ = ÷ = H p i i I A 1 ¿ + = ÷ = I p i j j i A 1 Granger‘s representation theorem states that if the coefficient matrix Π has a reduced rank r < k, then there exist k x r matrices o and | each with rank r such that Π = o|‘and |‘Y t is I(0). r is the number of cointegrating relations (the cointegrating rank) and each column of | is the cointegrating vector. Johansen‘s method is to estimate the Π matrix from an unrestricted VAR and to test whether we can reject the restrictions implied by the reduced rank of Π (Eviews 5 Users Guide, 2004). In calculating the number of cointegrating relations (r), it can be calculated using the following two test statistics (Enders, 1995): ¿ + = ÷ ÷ = n r i i trace T r 1 ) ˆ 1 ln( ) ( ì ì …………………………………………………………..(4) ) ˆ 1 ln( ) 1 , ( 1 max + ÷ ÷ = + r T r r ì ì ………………………………………………………(5) where i ì ˆ = the estimated values of the characteristics roots obtained from the estimated π matrix T = the number of observations The trace ì tests the null hypothesis that the number of distinct cointegration vector is less than or equal to r against a general alternative, meanwhile max ì tests the null hypothesis that the number of cointegrating vestors is r against the alternative of r+1 cointegrating vectors (Enders, 1995). 139 Vector Error Correction (VECM) Vector error correction (VECM) is a vector autoregression (VAR) model adding the error correction equation. The error correction equation is added when there is a cointegration in the model. If there are two variables, X and Y, and both variables are cointegrated the first difference of X t and Y t can be modeled using a VAR, augmented by including Y t-1 – θX t-1 as an additional regressor (Stock and Watson): t t t p t p t p t p t t u X Y X X Y Y Y 1 1 1 1 1 1 11 1 1 11 10 ) ( ... ... + ÷ + A + + A + A + + A + = A ÷ ÷ ÷ ÷ ÷ ÷ u o ¸ ¸ | | | ……………………………. (6) t t t p t p t p t p t t u X Y X X Y Y X 2 1 1 2 2 1 21 2 1 21 20 ) ( ... ... + ÷ + A + + A + A + + A + = A ÷ ÷ ÷ ÷ ÷ ÷ u o ¸ ¸ | | | ……………………………. (7) Granger CausalityTest Granger Causality test is a procedure for testing whether current and lagged values of one time series help predict future values of another time series (Stock and Watson). For example there is a VAR model for X and Y as follows: ¿ ¿ = = ÷ ÷ + + = n i n j t j t j i t i t u Y X Y 1 1 1 | o ……………………………………………………. (8) ¿ ¿ = = ÷ ÷ + + = n i n j t j t j i t i t u Y X X 1 1 2 o ì …………………………………………………… (9) Basically the Granger test is the the F-statistic testing the hypothesis that the coefficients on all the values of one of the variables in Equation 8 and 9 are zero which means that these regressors have no predictive for the left hand variable beyond that contained in the other regressors (Stock and Watson, 2007). In this test, there are four possible cases (Gujarati, 2003): 1. Undirectional causality from X to Y is indicated if the estimated coefficients on the lagged X in Equation 8 are statistically different from zero as a group and the set of estimated coefficients on the the Y in Equation 9 is not statistically different from zero. 2. Undirectional causality from Y to X is indicated if the estimated coefficients on the lagged Y in Equation 9 are statistically different from zero as a group and the set of estimated coefficients on the the X in Equation 8 is not statistically different from zero. 3. Feedback or bilateral causality exists when the sets of Y and X coefficients are statistically significant different from zero in both regressions. 4. Independence occurs when the sets of Y and X coefficients are not statistically significant in both regressions. Impulse Response Function The impulse response function traces out the response of the dependent variable in the VEC system to shocks or change in the error term, such u it and u 2t in equation 6 and 7 (Gujarati, 2003). DATA DESCRIPTION 140 The empirical analysis is conducted using monthly data from January 2000 until December 2009. Data for CPO international price is obtained from the International Monetary Fund (IMF) statistics, CPO domestic price is obtained from PT Smart, and price of cooking oil is gathered from the Ministry of Trade. All variables are expressed in nominal terms and take the form of natural logarithm for the estimation using Eviews 6. From the descriptive statistics and figure, it shows that the maximum price of CPO international price and cooking oil price occurred in the same month of March 2008. On the other hand, the maximum price of CPO domestic occurred in May 2008. TABLE 1: DESCRIPTIVE STATISTICS FOR CPO INTERNATIONAL PRICE (INT), CPO DOMESTIC PRICE (DOM) AND COOKING OIL PRICE (COOK), JANUARY 2000-DECEMBER 2009. Variables Mean Standard Deviation Minimum Maximum INT 471.20 219.71 185.07 1146.86 DOM 4600.22 2030.37 1862.7 9981 COOK 6008.89 2312.62 3212 12444 141 FIGURE 1: INTERNATIONAL CPO PRICE, JANUARY 2000-DECEMBER 2009 0 200 400 600 800 1000 1200 J a n - 0 0 J u l - 0 0 J a n - 0 1 J u l - 0 1 J a n - 0 2 J u l - 0 2 J a n - 0 3 J u l - 0 3 J a n - 0 4 J u l - 0 4 J a n - 0 5 J u l - 0 5 J a n - 0 6 J u l - 0 6 J a n - 0 7 J u l - 0 7 J a n - 0 8 J u l - 0 8 J a n - 0 9 J u l - 0 9 U S $ / t o n FIGURE 2: CPO DOMESTIC PRICE AND COOKING OIL PRICE IN INDONESIA, JANUARY 2000-DECEMBER 2009 0 2000 4000 6000 8000 10000 12000 14000 J a n - 0 0 J u l - 0 0 J a n - 0 1 J u l - 0 1 J a n - 0 2 J u l - 0 2 J a n - 0 3 J u l - 0 3 J a n - 0 4 J u l - 0 4 J a n - 0 5 J u l - 0 5 J a n - 0 6 J u l - 0 6 J a n - 0 7 J u l - 0 7 J a n - 0 8 J u l - 0 8 J a n - 0 9 J u l - 0 9 R p / k g Cooking Oil CPO Domestic EMPIRICAL RESULTS In order to test the stationarity of the data, unit root test is conducted. One of the methods used in testing unit root is the Augmented Dickey-Fuller (ADF) test (Table 2). Two different ADF equations are calculated to test the presence of unit root, the first model 142 include the constant variable and the second model constant and trend are included. In addition, Akaike Info Criterion (AIC) is used to calculate the best lag. The results indicate that all of the variables are I(1) at 95% critical value as expected which means that it is appropriate to conduct the cointegration test on all the variables. TABLE 2: AUGMENTED DICKEY FULLER (ADF) UNIT ROOT TEST RESULTS Variables ADF test (Constant included) Lag ADF test (constant and trend included) Lag Level Cooking Oil Price -1.0207 1 -2.3267 1 Domestic CPO Price -1.1593 5 -2.6762 5 International CPO Price -1.3689 5 -2.9764 5 First Difference Cooking Oil Price -8.8651 *** 0 -8.8277 *** 0 Domestic CPO Price -5.3825 *** 4 -5.3597 *** 4 International CPO Price -4.8495 *** 7 -4.8229 *** 7 Note: ***,**,* significant at 1%, 5% and 10% respectively All variables indicate the I(1), thus, the next step is to test cointegration between the three variables utilizing Johansen Cointegration test. The Johansen Cointegration test uses two tests, trace test and max-eigen value test. The Johansen cointegration test are affected by the number of lag used in VAR, this study utilized the Akaike information criterion (AIC) to choose the lag. The number of lag chosen is 2. Another issue in this method is determining the deterministic trend assumption of the test. The pantula principle is used in order to choose the deterministic trend assumption (Asteriou and Hall, 2007). The results reveal that there is one cointegration equation at the 1% significance level (Table 3). Therefore, it can be concluded that the three price variables are cointegrated of order 1. This implies that there may be exists a long run equilibrium relationship between the three variables. TABLE 3: JOHANSEN COINTEGRATION TEST Hypothesized no of cointegration Lag Trace Test Max Eigen-value Test Trace Statistic 5% Critical Value Max Eigen Statistic 5% Critical Value None 2 51.3176 *** 42.9153 39.1428 *** 25.8232 At most 1 2 18.1747 25.8721 13.0112 19.3870 At most 2 2 5.1635 12.5179 5.1635 12.5180 Note: ***,**,* significant at 1%, 5% and 10% respectively After identifying the number of cointegrating vector, a vector error correction (VEC) model is estimated (Table 4). The results show that cooking oil price is affected by the domestic price of CPO and its own lag price. Meanwhile domestic and international price of CPO affects each other. This can be explained since Indonesia is the largest producer of palm oil and also the largest exporter of CPO to the world market. On the other hand, international price of CPO not directly affecting cooking oil price but through domestic price of CPO. In 143 addition, the error correction (ER) coefficients indicates the time needed to adjust to the long run equilibrium and cooking oil price took longer time to adjust to the long run equilibrium. In other words, only 12.94 percent discrepancy between short-run and long-run cooking oil price is corrected within a month, hence it takes longer time to adjust. 144 TABLE 4: VECTOR ERROR CORRECTION MODEL PARAMETER ESTIMATES Variables Dependent Variables ACOOK ADOM AINT Constant 0.0070** 0.0110 0.0095 ACOOK t-1 -0.3245*** -0.4894** -0.1867 ACOOK t-2 -0.0117 -0.0858 -0.1473 ADOM t-1 0.2875*** 0.1728 -0.1378 ADOM t-2 0.1188 0.3827* 0.4190** AINT t-1 0.0601 0.1063 0.3039* AINT t-2 -0.1238 -0.4660*** -0.6209*** ER t-1 -0.1294*** -0.11912 -0.3533*** R 2 0.4666 0.1764 0.3160 Adj R 2 0.4323 0.1236 0.2721 Granger causality only implied a chronological ordering movement in the series (Brooks, 2008). The results of the Granger Causality tests (Table 5) support the previous results from the VEC estimates. It shows that the movement CPO domestic price will lead to the movement of cooking oil price. Meanwhile domestic CPO and international CPO price has bilateral causality between the two prices which means that movement on both prices will lead to the other movement. In order to analyze the magnitude of the effect of international price of CPO to both domestic prices, impulse response function analysis is conducted (Figure 3). TABLE 5: GRANGER CAUSALITY RELATIONSHIP TESTS RESULTS Null Hypothesis χ 2 P-value DOM does not Granger Cause COOK 8.9742 0.0113 COOK does not Granger Cause DOM 4.1760 0.1239 INT does not Granger Cause COOK 2.3276 0.3123 COOK does not Granger Cause INT 1.0203 0.6004 INT does not Granger Cause DOM 6.8259 0.0329 DOM does not Granger Cause INT 5.4123 0.0668 Impulse response function shows the response on the shock on CPO domestic price to cooking oil price and the response on the shock on CPO international price to CPO domestic price (Figure 3). The results imply that the effect of price change in CPO domestic price to cooking oil price will last longer than the change in CPO international price to CPO domestic price. This can be explained by two reasons, first is that the domestic CPO is the main raw material in producing cooking oil, therefore the cooking oil price is rather sensitive to the change in domestic price of CPO. The second reason is that a shock in the international price of CPO also causes the domestic price of CPO to change, therefore a shock in the domestic price of CPO is also caused by the shock in international price of CPO. Thus the shock in domestic price of CPO will generate a higher effect on cooking oil price. The effect of a shock in CPO domestic price on cooking oil price will peak after eleven months and will decrease gradually after that. Meanwhile the effect of the shock on CPO international price on CPO domestic price will peak on the second month and significantly will decrease. Both shocks have different characteristics, the shock of CPO domestic price on 145 cooking oil price has a smaller effect at the beginning but it will last longer meanwhile the shock of CPO international price on domestic CPO price has a larger effect at the beginning but it will decrease significantly. Looking at the accumulation effect after 12 months, a shock of CPO domestic price on cooking oil price will have a bigger effect (Figure 4). As one of the staple foods in Indonesia, affordable cooking oil price is important for the government and the consumer. From these results it can be inferred that the cooking oil price is sensitive to price changes of domestic and international CPO prices. In order to minimize the effect of price changes in cooking oil, several measures must be taken. The important thing is to anticipate the increase of international CPO price which will affect the domestic CPO price and eventually the cooking oil price. One of the anticipations is to increase the domestic CPO stock when the international CPO price begins to increase. 146 FIGURE 3: COOKING OIL PRICE RESPONSE TO A SHOCK IN CPO PRICE AND CPO PRICE RESPONSE TO A SHOCK IN INTERNATIONAL CPO PRICE 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 1 2 3 4 5 6 7 8 9 10 11 12 CPO --> CO INT --> CPO FIGURE 4: COOKING OIL PRICE AND DOMESTIC CPO PRICE ACCUMULATION RESPONSE TO A SHOCK ON DOMESTIC CPO PRICE CPO AND INTERNATIONAL CPO PRICE 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 1 2 3 4 5 6 7 8 9 10 11 12 CPO --> CO INT --> CPO CONCLUSION 147 1. The domestic cooking oil price, the domestic price of CPO and the international price of CPO is cointegrated. This implies that the three variables have a long-run equilibrium relationship. 2. The paper shows that the CPO international price causes the CPO domestic price. In addition, the CPO domestic price causes the cooking oil price. Hence, the cooking oil price is directly affected by the domestic CPO price and indirectly affected by the international CPO price.. 3. A shock to the CPO domestic price has a longer affect on the cooking oil price compared to a shock of the international CPO price to the CPO domestic price. 4. Anticipation measures must be taken in order to minimize the increase in the cooking oil price especially when the international CPO price begins to increase. 148 REFERENCES Asterious, D and S.G. Hall. (2007). Applied Econometrics: A Modern Approach. New York: Palgrave. Baffes, J. and M.I. Ajwad. (2001). ―Identifying Price Linkages: A Review of the Literature and an Application to the World Market of Cotton‖, Applied Economics, 33, 1927- 1941. Baffes, J and G. Gohou. (2005). ―The Co-movement between Cotton and Polyester Prices‖. World Bank Policy Research Working Paper 3534. World Bank. Brooks, C. (2008). Introductory Econometrics for Finance. New York: Cambridge. Enders, W. (1995). Applied Economic Time Series. New York: John Wiley and Sons.. Eviews 5 User‘s Guide. (2004). Quantitative Micro Software. Gujarati, D.N. 2003. Basic Econometrics. Fourth Edition. Singapore: Mc Graw Hill,. International Monetary Fund. IMF Primary Commodity Prices. Available from URL: http://www.imf.org/external/data.htm Ministry of Trade. Trade Statistics. various years. Munadi, E. (2007).―Export Tax Reduction and Its Implication on Indonesian Export of Palm Oil to India (An Error Correction Model Approach)‖, Informatika Pertanian,16(2), 1019-1036. Pan, S., S. Mohanty and M. Fadiga. (2007). ―Price Asymmetry in the US Fibre Market. Applied Economic Letters‖, 14, 545-548. PT Smart. International Prices. Available from URL: http://www.smart- tbk.com/investor_international.php Stock, James H and Mark W Watson. 2007. Introduction to Econometrics. Second Edition. Boston: Pearson Addison Wesley. 149 SUGAR-TRADING POLICY TOWARD THE AVAILABILITY AND DOMESTIC PRICE, INDONESIA Maria Satya Wacana Christian University Diponegoro street number 52-60 Salatiga, Indonesia. Telp.0298-321212, Fax. 0298-321433. Email :
[email protected] ABSTRACT Sugar trading in Indonesia is never free from government regulation. Government has policies to manage sugar-trading and these have impact at the national production, marketing/distribution, availability, imports and sugar prices within the country.. Sugar- trading has not only technical problems, but operates under a system with many components which influences it. This study describes the role of sugar-trading policy in Indonesia with forecasts for the future. It uses time series data from 1970 until 2005 and Shazam for Windows Professional to analyse the data. The results of this research indicate that the land area, quantity of sugar factories, and differences between the domestic price and world price influence the stock of sugar. The trading policy in each and every period, production, consumption, world price, and rupiah exchange rate all influence the domestic price. Sugar trading policy has a direct influence on domestic price but not to the sugar stock in Indonesia With the analysis of the trends ,it is not possible to forecast future Indonesian sugar prices . Keywords: sugar-trading policy, availability, production, domestic price INTRODUCTION Sugar is one of the nine principle commodities which function as the source of energy/calories for the consumers. In Indonesia, sugar is the second most strategic food commodity after rice. People are consuming sugar as the source of calories or the more prominent function is as a sweetener or preservative food additive. The government endeavors to keep the availability of domestic sugar to be affordable by a food defense program (agriculture revitalization program). Food defense in the national order is the ability of a country to assure the whole population in a country of receiving adequate amounts of food, edible quality, safe, and rightful, which is based on the optimization of the function and the foundation on various domestic commodities. One indicator to measure the food defense is through the dependence of national food against the imported products. (Program Revitalisasi Pertanian, Perikanan, dan Kehutanan (RPPK) - Revitalization Program of Agriculture, Fishery, and Forestry - which was authorized by the President of Indonesia on June 11, 2005 in Jatiluhur, West Java, implies the 150 importance of setting up an unwavering food defense which focuses on the increasing of national product capacity for the greatest five food commodities, which are rice, sugar, corn, soybean, and beef. Price is one of the farmers’ considerations to choose the commodity. In a situation where price gives a low profit or is less beneficial and lower than the production cost, it is not possible for the farmer to choose that commodity. In the sugar context, since sugar becomes a commodity with the access to the broad global market, any small change of the external factor will affect the prices created in the domestic market. Protection for sugarcane planters/farmers and industry becomes really important to avoid a distortive trap of sugar prices (Sabil, 2004). The financial crisis did not only affect the production but also the consumption of sugar .l. When the financial crisis occurred sugar consumption was lowered by 23,56%. Within the last fifteen years, the average of sugar consumption has risen 1,43% each year. The decrease of sugar consumption is caused more by the much higher sugar prices that reduce people’s consuming ability. Along with the general economic conditions which is relevant to people’s incomes, the consumption of sugar subsequently increased though not yet to the level of before the crisis. TABLE 1. NATIONAL SUGAR CONSUMPTION 1991 – 2005 Year National Consumption (ton) % Consumption Increase % Production upon Consumption 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2.519.732 2.435.166 2.691.856 2.929.123 3.170.936 3.067.483 3.366.944 2.724.953 2.889.171 2.989.171 3.150.866 3.300.808 3.300.811 3.388.808 3.439.640 -3,47 9,54 8,10 7,63 -3,37 8,89 -23,56 5,68 3,35 5,13 4,54 0,00 2,60 1,48 89,40 94,76 92,23 83,60 66,12 68,27 65,04 54,74 51,52 56,56 54,76 53,18 49,44 60,54 65,17 151 In fact, within the last fifteen years, domestic production is just able to supply 67,02% of national consumption needs, indeed, from the monetary crisis of 1997-8 up till 2003, the production was just 50% of total consumption. Thus, 33% of total sugar consumption needs to be imported to satisfy people’s consumption. Yet, this sugar import requirement does not include the supply or stock especially if there is a big increase in demand , even though sugar is not as important as rice. STATEMENT OF THE PROBLEM In 1930-1932, Indonesia became the world’s main country in producing sugar, and this reached almost 3 million tons. At that time, there were 179 sugar factories which had over 19,665,000 ha. of sugarcane plantation. With the ability of exporting sugar of approximately 1.5-2.0 million tons, Indonesia was the second biggest country in its ability in producing sugar after Cuba (Birowo and Winarno, 1988). But, since that time,the sugar factory was taken over by the Indonesian government (after Indonesia gained independence) and slowly, the production of these sugar factories decreased.. Nevertheless, the sugar industry still survived and it receives support, protection and subsidies from the Indonesian government. The rate of production increase is still lower than the consumption so the importing requirements continue to rise (Masyuhuri, 2005). Along with the increasing population, the demand of sugar also increases. This increasing consumption should be immediately responded to by the government especially in a matter of supply (from domestic production, import production, or both). To fulfill the growing needs for sugar, the government has made various efforts to encourage the rise of domestic production through various kinds of policies, such as TRI, rehabilitation of sugar factories, costing provenue price, and many other actions which are designed to maintain the availability of sugar by protecting domestic producers without inflicting financial losses on consumers. Indeed, conditions and problems related to the national sugar supply are complex because of many factors such as the production, consumption, imports and also trade or commerce. These e factors cannot be separated from the policy authorized 152 by the government. Considering sugar as one of the nine principle commodities which it is required . According to Khofilah (1995), the government intervention is done for strong reasons. The government has an interest in sustaining price stability and sugar supply outside the market. Unsupported conditions may create instability.. The government has been uninfluenced by the superior power of other groups. This condition is reflected each time the government has formulated its sugar policy, especially its sugar trading policy. Besides its production and input policy, the government has also developed a distribution policy and sugar trade and commerce to keep stability of the supply and maintain stability and the sugar price in the domestic market. Moreover, distribution and trade policy is far more intensive rather than production and inputs policy. Among those policies, Keppres No 43/1971 is an example of government intervention in the field of sugar distribution. Basically, this Keppress gives Bulog the authority to keep the stability of sugar price and supply (Susila, 2002). OBJECTIVE OF THE STUDY 1. To ascertain the major factors that affect the availability of sugar 2. To ascertain the main factors that affect the production of domestic sugar 3. To ascertain the major factors that affect the domestic sugar price 4. To ascertain the forecast (projection) about the further condition of sugar in Indonesia 5. To ascertain the effect of trade policy upon the availability, production, import, and the domestic sugar price in Indonesia RESEARCH METHODOLOGY Data which is used is secondary data which was collected from Dewan Gula Indonesia, Agriculture of Departement, Statistic of Center, P3GI, various publications or other publications which relate to sugar . Data which is used is in the form of time series data in the years of 1970-2005, which is analyzed using Shazam for Windows Profesional’s program. Quantitative data which is needed include; sugar production (hablur), consumption, stock/supply, import, rendemen (sucrose content), the area of sugarcane plantations, sugarcane productivity, the number of sugar factories, domestic sugar price, global sugar price, IHK, GDP, the exchange rate of rupiah, the 153 population of Indonesia, etc. Meanwhile, the qualitative data which is needed is the history or the development of sugar policies which have been applied in Indonesia, especially sugar trade policy. Hypothesis 1 Kt = a + b 1 L + b 2 PG + b 3 SP + b 4 D1 + b 5 D2 + b 6 D3 + u Note: Kt = Sugar Supply (ton); a = intercept, b1-b6 = coefficient of regression; L = the width of area (ha); PG = the number of sugar factories; SP = Price interval between domestic price and global price (Rp/ton); D1 = dummy, value 1 for the policy of sugar trade in the Bulog period, others 0; D2 = dummy, value 1 for the policy of sugar trade in the global market period, others 0; D3 = dummy, value 1 for the policy of sugar trade in the import control period, others 0; u = residual Hypothesis 2 Q = a + b 1 L + b 2 R + b 3 PG + b 4 D1 + b 5 D2 + b 6 D3 + u Note : Q = production of sugar (ton); a = intercept; b1-b6 = coefficient of regression; L = the width of area (ha); R = sucrose content (%); PG = the number of sugar factories; D1 = dummy, value 1 for the policy of sugar trade in the Bulog period, others 0; D2 = dummy, value 1 for the policy of sugar trade in the global market period, others 0; D3 = dummy, value 1 for the policy of sugar trade in the import control period, others 0; u = residual Hypothesis 3 Pd = a + b 1 Pi + b 2 ER + b 3 I + b 4 Q + b 5 C + b 6 D1 + b 7 D2 + b 8 D3 + u Note : Pd = the price of domestic sugar (Rp/ton); a = intercept; b1-b8 = coefficient of regression; Q = sugar production (ton); C = sugar consumption (ton); Pi = global price (US$/ton); ER = Exchange rate of rupiah upon dollar (Rp/US$); I = sugar import (ton); D1 = dummy, value 1 for the policy of sugar trade in the Bulog period, others 0; D2 = dummy, value 1 for the policy of sugar trade in the global market period, others 0; D3 = dummy, value 1 for the policy of sugar trade in the import control period, others 0; u = residual Trend Analysis 154 Trend analysis is a simple regression analysis over time to forecast the future time series data, whether it still has a tendency to increase or decrease. Each variable has its own pattern which can also be described or visualized as either a curve or a trend . Some forms of trends are equal. e (Granger, 1980): a. Linier (straight line), Y(t) = a + bt b. Exponential, Y(t) = exp (a + bt), so log Y(t) = a + bt c. Quadratic (parabolic curve), Y(t) = a + bt + ct 2 d. Exponential modification Curve, Y(t) = a + br t e. Gompertz Curve, log Y(t) = a + br t , with 0 < r < 1 f. Logistic Curve, Y(t) = 1/(a+br t ), with 0 < r < 1, so 1/Y(t) = 1/(a+br t ) RESULTS AND ANALYSIS A. The Availability of Sugar The availability shows the amount of sugar offered (provided) in the domestic market. The model of diestimasi availability as a function of sugar-trade policy (including: the period of Bulog, global market, and import control), the number of sugar factory, the width of area, and the interval between domestic and global price has a determinate coefficient 0,8146. It means that 81,46% variation of sugar availability can be explained by variation from some independent variables in the research model. When it is viewed from the test result t shows that the only wide variable, the total of PG, and price interval which individually have significant influence toward the availability of sugar. The wide variable and the total of PG show the source of domestic sugar’s availability, while the price interval shows the source of foreign/import sugar’s availability. At the average level, 1% of the increasing area width can improve the availability of national sugar as much as 65,23%, in this case, the increasing number of PG is related to 1% of grind/rolling capacity (attached capacity) results in the increase of sugar availability as much as 116%, while 1% improvement of domestic and global price’s interval cause the increase of sugar availability on 5,37%. 155 Therefore, the availability of sugar in Indonesia is more influenced by domestic factors which are mainly affected by area width and the efficiency of sugar factories. With the increasing width of sugar-cane plantations, it is really expected that the production of national sugar (hablur) will increase, with the assumption of the increased width of the sugar cane plantations in lines with the increase of sugar- cane productivity especially in Java, where the land is so limited for affording sugar- cane agriculture compared to the availability of land outside Java. The accomplishment of the needs of sugar for either consumption or stock/supply from domestic production is more elastic than imports. Such a condition should be utilized because even with just a little positive change (the improvement of area width and productivity, good sugar price, optimization of the available PG, support from the government, etc) the result will be much greater rather than giving support to imports. On the contrary, a few negative changes appears on the sugar industry (upriver-lower course), especially the decline of area width will result in a decrease of the availability from domestic production . Thus, the further step to fulfill the needs is by importing. The bigger the interval between the domestic and global price, the bigger sugar imports will be required and vice versa. It is really expected that the fulfillment of sugar consumption (directly) is from the domestic product, and if it is not sufficient, the lack of industry’s needs (indirect consumption) can be supplied by imports. Sugar imports are expected in the form of raw sugar as the basic/raw material for the sugar refining industry. Importing (white sugar) is done if the condition of domestic sugar cannot supply the demands of consumers and the stock/supply for further months has been calculated. TABLE 2. REGRESSION RESULT ( THE AVAILABILITY OF SUGAR IN INDONESIA) No Independent Variable Coefficient Error T test Average of Elasticity 1 2 3 4 5 6 7 D1 D2 D3 The number of sugar factories (PG) The width of area (L) Price interval between domestic price and global price (SP) Constant -0,421.10 6 0,1268.10 6 -42950 51033* 51122** 0,30358* -0,21.10 7 0,3787.10 6 0,3143.10 6 0,3667.10 6 0,2763.10 5 2,045 1,720 -1,509 -1,1110 0,4034 -0,1171 1,847 2,500 1,720 -1,509 -0,1120 0,0077 -0,0021 1,1600 0,6523 0,0537 -0,7628 156 Adj R 2 = 0,8146 DW test = 2,1138 F test = 404,13*** D h stat = -0,6667 F Table (1%) = 3,555 B. Production of National Sugar If in the breakdown component forming the availibility is production, net stock, and imports, the result of production estimation shows one of the significant variables which influences the national production of sugar is the trade policy in the period of import control. Net stock is an interval between starting stock and ending stock in certain years because of consumption. Meanwhile, one of the significant results of import estimation is the trade policy in the period of Bulog. It shows indirectly that the trade policy influences the availability of sugar. The production of sugar is estimated as the function of the trade policy (three periods), are width, rendemen, and the number of sugar factories. The accuracy of this model is shown with the value R 2 which is adjusted as much as 0,8893. It means that 88,93% of product variation can be explained by the independent variable from the model, while 11,07% is explained by other variables which are not included in that model The significant result of test F (99%) shows that the trade policy (three periods), area width, endemen, and the number of sugar factories altogether give influence on the sugar production. To find out the effect of each independent variable, a test t is done. From table 3, it is known that in the three periods of time of trade policy over 36 years (1970 - 2005), the trade policy from the import control period (after 2002) is the only policy that has significant influence toward sugar production. TABLE 3. REGRESSION RESULT ( PRODUCTION OF NATIONAL SUGAR) No Independent Variable Coefficient Error T test Average of Elasticity 1 2 3 4 5 6 D1 D2 D3 The width of area (L) Sucrose content (R) The number of sugar factories (PG) 18786 -56589 277760* 2,9772** 48985 49824** 1,46.10 5 1,56.10 5 1,63.10 5 0,9352 3,81.10 4 1,64.10 4 0,1286 -0,3634 1,708 3,183 1,286 3,041 0,0086 -0,0048 0,0188 0,578 0,2322 1,8636 157 7 Constant -2,77.10 6 9,75.10 5 -2,842 -1,689 Adj R 2 = 0,8893 DW test = 1,7344 F test = 47,853*** D h stat = 1,1371 F table (1%) = 3,50 The sugar trade policy in the period of import control are Kepmenperindag No.643/MPP/Kep/9/2002 which limits the importers (only Producer Importers and Registered Importors) which are allowed to do imports to protect the domestic price and farmers’ incomes. Although , this limitation give an opportunity for illegal sugar imports which could automatically affect the domestic sugar price, the policy was then revised in the form of determining sugar price at the farmer level as much as Rp 3.410/kg (Kepmenperindag No 527/MPP/Kep/9/2004), Rp 3.800/kg (Peraturan Menteri Perdagangan No. 08/M-Dag/Per/4/2005), and Rp 4.800/kg (Permendag No. 19/M-Dag/Per/4/2006). From a trade/commerces point-of-view, the pricing policy indicated brings a positive climate for the producers. The policy of limiting imports is done in order to increase the domestic price (because the global sugar price is relatively lower than the domestic price) as a result, producers receive incentives to improve their production. In that period of time, the trade policy was supported by other policies which were that in 2002 , the Agricultural Department developed a national acceleration program (the improvement of sugar production). This program’s purpose was to optimize the productivity in sugar factories through arrangement and plant rehabilitation, factory equipment/machines, factory management , and also recapitalization of the available research institutes (P3GI). The trade policy in the Bulog period and the global market shows an insignificant result in its effect on production. The sugar trade policy from the Bulog period of time gives a positive effect on the production even though it is not significant. In this period of time, the policy which was used for increasing production was the policy TRI, based on Inpres No. 9 year 1975 which was valid until a new policy appeared in 1992, UU No. 12 year 1992. Although the increasing production was not caused by the increasing productivity neither the sucrose content, but it was the result of sugar cane area expansion either TRIS (rice field) or TRIT (dried field). Meanwhile, the portion of production which was controlled over by Bulog from PG PNP was getting 158 smaller (60-70%) because Bulog is only allowed to buy sugar which is a part of PG PNP. Sugar (TRI) from non PNP is freely distributed (30-40%). As a result, there is a price fluctuation as a result of the merchantmen speculation besides the decreasing amount of sugar stock in Bulog. In 1990s, the sugar production was declining, moreover after the government sent out UU No. 12 year 1992. Many sugarcane farmers replaced their agricultural commodities with other commodities particularly rice as Indonesian staple or primary commodity. Besides that, as the location of sugarcane plantation is scattered which influences the productivity and the sucrose content, the condition of PG itself which was inefficient, an expensive basic cost for production especially when the monetary crisis occurred also had a negative effect on sugar production. The trade policy in the period of the global market had a negative influence on domestic sugar production even though it was not significant. Freeing the sugar import tax causes uncontrollable sugar imports. It is getting worse with the high prices of domestic sugar production as the result of monetary crisis in1998. In the global level at that time, there was a global surplus of sugar (low global price) that made domestic sugar unable to compete with foreign sugar in the matter of price. The width of area is a significant factor affecting the production with a reliability level of 95%. In the average level (1970-2005) 1% expansion of sugarcane area’s width causes the increase of sugar production by as much as 57,8%. The increase of area’s width is the main factor that causes the rise of sugar production. Nevertheless, the width expansion should be in line with the improvement of the productivity (intensification), considering the limited area or space for agriculture in Java, also to compete with other commodities. The sucrose content of sugarcane shows the amount of sugar substance included in sugarcane. In the harvest time, felling system, location distance to PG, climate, and also agriculture cultivation really affect the amount of sucrose content. An example of the long dry season in 2006 caused decreasing production and reached 15% (P3GI’s calculation). Sugarcane content results are various, so is the accuracy of the measurement. A sugar factory which calculates the sucrose content accurately 159 motivates the planters to supply high quality sugarcanes, so the sucrose content of the sugar factory will be high as well, considering that sugar is produced by plants instead of factories. Nevertheless, within 1970 – 2005, in fact, sucrose content does not account for any significant increase in sugar production. Besides the area’s width, another factor which is also significant in affecting production is the number of survive sugar factories which are still available (trusting level 95%). Now, there are 58 survive sugar factories which are available in Indonesia (46 are in Java and 12 are outside Java) with grinding capacity on average of 195.810 ton sugarcane each day. The grinding time is usually on May- October. 1% average of the increasing PG will cause the increasing sugar production of 86.36%. It could be categorized as a large influence, but the factory’s infestation, payback period, the availability of raw materials should still be considered. Considering the declining amount of sugarcane plantation in Java, while outside Java, there are also various constraint (soil type, weather, infrastructure condition, social-economy factor, etc), thus, it would be better to optimize the productivity of the sugar factories’ capacity as a step to overcome the idle capacity. Looking at the growth using an index of production, it is shown that the production growth is quite high between 1970 – 1992. Even, the highest production in1992 later decreased in the next year as the result of the withdrawal of the TRI program. The rendemen or the sucrose content and its productivity were relatively declining for many years and only started to increase after 2002. TABLE 4. TREND COEFFICIENT INDEX QUADRATIC OF SUGAR PRODUCTION IN INDONESIA No Variable Coefficient Std Error T test 1 2 3 Case Sequence Case Sequence2 Constant 0,177*** -0,003*** 0,576** 0,023 0,001 0,186 7,609 -5,586 3,091 Adj R 2 = 0,773 F test = 56,145*** Source : Secondary Data Analysis Note : *** = significant with the reliability level of 99% ** = significant with the reliability level of 95% All this time, the sugar production followed up the quadratic trend model. With this trend model, the next year’s sugar production was projected to decline again. The estimation result of domestic sugar production up until 2010 can be viewed in 160 table 10. In order to avoid decreasing sugar production, the government is expected to provide protection for the producers with all relevant policies with the price approximation for the farmer and the limitation of importing sugar, besides the upriver policy (agriculture). This is important because most of the sugar consumption is fulfilled from domestic production. TABLE 5. THE RESULT OF INDEX PROJECTION AND HABLUR (SUGAR) PRODUCTION IN INDONESIA YEAR 2006-2010 Year Index Production(ton) 2006 2007 2008 2009 2010 3,018 2,970 2,916 2,856 2,790 2.137.695 2.103.696 2.065.447 2.022.948 1.976.199 Source : Secondary Data Analysis The growth of sugar production is relatively less than the consumption growth. Moreover, the consumption growth is unstable. Sugar production is seasonal (one production each year with the grinding process in May-October). Meanwhile, the consumption of sugar is increasing as the population increases. Such a condition encourages the government to allow importing to fulfill the population‘s needs. C. Sugar Domestic Prices in Indonesia In the history of sugar trade policy, import and prices are the most common issues which often receive government attention.. The estimated domestic price is the retail price which is applied with the index of consumer prices specified on food (IHK food) to avoid the effect of inflation. The global price is not actuated because of the unit of US$/ton. The domestic price is estimated as a function of trade (the period of Bulog, global market, import control), production, import, consumption, global price, and the exchange rate of rupiah/US$. The result of this regression model shows a determination coefficient 0,9826. This means that 98,26% of various independent variables in this model can explain the various domestic prices, while the rest is explained by other variables which are not included into the model. The value of point F is calculated as 92,815 significant with a reliability level at 99%. This means that altogether, the trade policy (the period of Bulog, global market, and import control), production, import, consumption, global 161 prices, and the exchange rate of rupiah/US$ had an effect on the sugar domestic prices in Indonesia. TABLE 6. REGRESSION RESULT (SUGAR DOMESTIC PRICES IN INDONESIA) No Independent Variable Coefficient Error T test Average of Elasticity 1 2 3 4 5 6 7 8 9 D1 D2 D3 Production (Q) Import (I) Global price (Pi) Consumption (C) Exchange rate of rupiah upon dollar (Rp/US$) Constant -2,67.10 5 ** -1,3.10 5 ** 2,01.10 5 *** 9,3.10 -2 *** -1,17.10 -2 136,62** 5,49.10 -2 * 61,575*** 38896 1,05.10 5 5,19.10 4 4,96.10 4 3,26.10 -2 4,2.10 -2 58,17 3,01.10 -2 14,16 1,05.10 5 -2,538 -2,501 4,503 2,857 -0,2792 2,349 1,825 4,348 0,3701 -0,495 -0,0524 0,0648 0,4111 -0,0157 0,1295 0,3281 0,525 0,0973 Adj R 2 = 0,9826 DW test = 1,7091 F test = 92,8158 D h stat = 0,50376 F Table (1%) = 3,45 Source : Secondary Data Analysis After a test t is done, this shows that the trade policy variable (the period of Bulog, global market, and import control), production, import, consumption, global prices, and the exchange rate of rupiah/US$ had a significant influence on the sugar domestic prices. The only variable which is insignificant toward domestic prices is the quantity of sugar imported. Therefore, the thing that influences the domestic price is not the quantity of imported sugar but it is more on the tendency of global sugar prices and the exchange rate of rupiah/US$. The sugar trade policy which is implemented to keep the stabilization of the domestic price, still protects producers or the Indonesian sugar industry in general. The trade policy came out in the period of Bulog had a negative correlation with a reliability level of 95%. With this policy, determination policy on provenue price) may have caused declining domestic prices as much as 49,5%. The price policy was created to protect the producers (if the market price is too low) or to protect consumers if there is a rise of price as the result of inflation, etc. The sugar trade policy in the Bulog period was the barrier of non tariff protection (import and distribution) which isolated the domestic sugar market from the sugar global market. The result tended to be stable on the either consumers or producers’ levels. But, it caused inefficiency 162 because the margin or the price interval among producers and consumers’ level was quite large. The sugar trade policy in the period of global market obviously had a negative impact toward domestic sugar prices. With the capitulation of the sugar trade to the market mechanism, imported sugar may freely come in Indonesia. This policy was obliviously ineffective to protect the national sugar industry. The distorted global sugar as a result of protection of producer countries with subsidies and many other policies caused the global sugar prices to be relatively lower than the domestic sugar prices. Moreover, in the period of time of this policy there was a global sugar surplus. With this policy, the domestic sugar prices in the average level decreased 5,24% with a reliability level of 95%.S uch condition caused the declining domestic sugar (hablur) production even though the impact is insignificant. Not all the policies had a negative relationship with the domestic prices. In fact, the trade policy which come out in the period of import control had a positive impact toward domestic prices and this was the most significant impact (with a reliability level is 99%). This policy enabled an improvement in domestic prices of 6,48%. The trade policy which came out in this period included: controlling imports by limiting only Registered Importers (RI) and Producer Importers which were allowed to do sugar importing (Kepmenperindag No. 643/MPP/Kep/9/2002) with various relevant revisions with the sugar price determination at the farmers/planters level. The last policy (Role of Minister of Trade No.19/M-DAG/PER/4/2006) determined the prices of white sugar at the farmer level Rp 4.800/kg. The limitation of imports and the positive support toward domestic prices gave incentives for sugar producers and also for the sugar industrialists to improve the production to reach sugar self-sufficiency, especially for direct consumption. The production of sugar had a significant impact (99%) on the domestic prices. Every 1% of the average production improvement increased the domestic prices 41,11%. Such a condition is an anomaly of the law of supply which states that as the supply increases, the price will decrease. But, it will not happen to the domestic prices of sugar in Indonesia. It is because most of sugar availability is produced domestically 163 in which the production growth is relatively slower compared with the consumption growth. In the last 15 years, the average of sugar production is only able to fulfill 67,02% of the total sugar consumption. Besides that, the global sugar supply in 2004 was declining as the result of the high price of fuel and the reformation of sugar world policy in Uni Europe which made the sugar producing countries in Europe convert the sugar production into ethanol. This made the global condition of sugar to be smaller so the general prices of sugar increased (more competitive). The increase of the world sugar prices also meant that domestic prices also increased, as in previous research which shows that there is an interrelationship between domestic and global sugar prices. Although the recent years’ production shows positive growth, import are still done because there is still not enough local supply to suffice the consumption needs (either direct or indirect) and stock. The higher quantity of importing sugar, the lower the domestic prices will be, even though the impact is insignificant. The domestic prices are influenced more by global prices and the exchange rate of Rp/US$. The productivity of sugar in Indonesia cannot be separated from the world/global sugar condition and its policy. The global sugar prices influence domestic sugar prices with a reliability level of 95%. At the average level, a 1% increase in global sugar prices (US$/ton) improves domestic sugar prices as much as 12,95% (Rp/ton). Beside the existence of the improvement of protection affectivity after the appearance of Kepmenrindag No. 643/MPP/Kep/9/2002, the more competitive policy of global prices causes the increase of domestic sugar prices. It shows a transmission and integration of the global and the domestic sugar prices. In international trade, the exchange rate has an influence on the prices related to how much either import or export value are determined.worldwide The exchange rate of rupiah/US$ brings a significant impact to the domestic sugar prices in Indonesia with a reliability level of 99%. An average of 1% improvement of the exchange rate of rupiah/US$ or if the rupiah is weakening this cause s the domestic sugar prices to increase by 52,25%. The weakening condition of the rupiah 164 againstthe US$ becomes a consideration for the importers because imports are more costly. As a result, the domestic prices on this commodity will also increase.. The retail prices for the consumers affect the scale of the consumption leveland vice versa. But, the scale of price impact depends on the type of things/goods, price elasticity, and many other factors. Much of the sugar consumption in this analysis also affects domestic sugar prices with a reliability level of 90%. The improvement in sugar consumption at the average level causes an increase of 32,81% in domestic prices. The increasing sugar consumption is also caused by the increase in direct consumption as a direct result of the human growth and also the indirect increase in consumption as a result of the increasing number of food, beverage, pharmacy products,, etc. Although it is also possible to use other sweeteners (non-cane sugar or synthetic sugar) which also experience improvement in line with the diversification of consumers’ needs. Since 1975, retail sugar prices have increasing. In the period of Bulog, it was clearly shown that the retail prices were relatively stable with a lower growth level compared to the period of import control. In the period of the global market, retail prices were relatively constant from the previous year. The increase happened in 1998/1999 as a result of the monetary crisis (a large increase in inflation on all commodities). The increasing price in the period of import control (up until now) is relatively bigger than in the previous period. This increase appears as a result of the growing provenue prices (domestic production) as much as Rp 4.800/kg, The import tax Rp 550/kg for raw sugar and Rp 700/kg for white sugar, the reinforcing of the exchange rate of the rupiah, etc. to estimate further domestic prices in the next few years, a trend with an exponential pattern is calculated which is the best pattern for serial data of domestic sugar prices in Indonesia. The result can be seen in table 6 . TABLE 7. TREND COEFFICIENT INDEX QUADRATIC OF DOMESTIC SUGAR PRICE IN INDONESIA No Variable Coeffiecient Std Error T test 1 Case Sequence 0,110*** 0,003 33,830 165 2 Konstanta 1,008*** 0,060 16,808 Adj R 2 = 0,975 F test = 1144,496*** Source : Secondary Data Analysis Note: *** = significant with the reliability level of 99% By using this exponential trend, in the next few years, the domestic prices will continually increase. The forecast or projection result until 2010 can be seen in the table below. As the prices take a favorable turn, the domestic sugar price can be an incentive for all the producers, sugarcane planters, and also the sugar industrialists to improve local sugar production to gain sugar self-sufficiency, especially for the direct consumption. TABLE 8. THE PROJECTION RESULT OF INDEX AND DOMESTIC SUGAR PRICE IN INDONESIA 2006 - 2010 Tahun Indeks Harga Domestik (Rp/ton) 2006 2007 2008 2009 2010 34,04 38,00 42,42 47,35 52,86 5.615.274 6.268.135 6.996.902 7.810.399 8.718.478 Source : Secondary Data Analysis CONCLUSIONS AND RECOMMENDATIONS A. Conclusions 1. The availability of sugar is significantly influenced by the area’s width, the number of sugar factories and the price of domestic and global price. The influence of domestic production factor is more elastic than imports. 2. The significant factor that affects the production of sugar (hablur) is the sugar trade policy in the period of import control, the area’s width, and the number of sugar factories operating. 3. The price of domestic sugar is significantly influenced by the trade policy in every period, production, consumption, global sugar’s price, and the exchange rate of rupiah/US$. 166 4. The sugar trade policy affects directly toward domestic price, but indirectly toward the availability of sugar in Indonesia. The trade policy influences more on the production and sugar import which is the component of national sugar availability. 5. The sugar trade policy in the period of Bulog tends to be used to keep the stabilization (pressing import and the domestic price to keep the price stable). The trade policy in the period of global market is only significant in affecting domestic price with negative correlation. While sugar trade policy in the period of import control, significantly gives positive effect toward either the production or the domestic price of sugar. B. Recommendations The improvement of intensification and extensification of sugarcane agriculture, efficiency of sugar factories, the existing sugar factories, and economy stabilization (monetary policy which is related to the rate exchange of the rupiah toward US$) are really necessary to fix the condition of national sugar-matter to gain sugar self-sufficiency. 1. The need of support toward producers/ sugar industry to improve the production with competitive price assurance, considering the effect of production on the availability of sugar is more elastic than imports(the synergy between the trade policy with the production policy (on farm)). 2. The trade policy in the period of import control still can be followed up to limit imports and protect producers/ national sugar industry. Importing sugar is mainly in the form of raw sugar as the basic/raw materials especially for rafinasi sugar‘s factory and also to utilize idle capacity which is in some sugar factories. 167 REFERENCES Anonim (1997). Studi tentang Pemasaran dan Prospek Industri Gula Indonesia. PT. International Contact Business System Inc. Anonim (2005). Road Map Swasembada Gula 2005. Dirjenbun/Sekretariat Dewan Gula Indonesia. Jakarta. Anonim (2005). Prospek dan Arah Pengembangan Agribisnis Tebu. Badan Penelitian & Pengembangan Pertanian. Departemen Pertanian Jakarta. Anonim (2005). Rencana Aksi Pemantapan Ketahanan Pangan 2005-2009. Departemen Pertanian. Jakarta. Anonim (2006). Road Map Swasembada Gula 2006. Dirjenbun/Sekretariat Dewan Gula Indonesia. Jakarta. Anonim (2006). Laporan Penyusunan Pengembangan Agribisnis Gula Berbasis Tebu di Jawa Tahun 2005. Kerjasama antara DGI dengan Pusat Penelitian Perkebunan Gula Indonesia. Pasuruan. Granger, C.W.J, (1980). Forecasting in Business and Economics. Academic Press Inc. USA Kholifah, E. (1995). Ekonomi Politik Perdagangan Gula di Indonesia. Tesis. Pasca Sarjana Universitas Gadjah Mada. Yogyakarta. Tidak dipublikasikan. Masyhuri (2005). Analisis Kebijakan Pergulaan Nasional. Dalam Konsolidasi Kebijakan Pergulaan Nasional. Fakultas Pertanian. UGM. Yogyakarta. Sabil, H.M.A (2004). Industri Gula dalam Perspektif Bisnis : Produksi dan Harga Gula. Mid Kongres IKAGI. Yogyakarta. Susila, W.R (2002) Kebijakan Pergulaan di Beberapa Negara Produsen dan Alternatif Kebijakan Pergulaan Nasional. Prosiding Pertemuan Teknis P3GI. Pasuruan. Winarno, F.G dan Birowo, A.T, (1988). Gula dan Pemanis Buatan di Indonesia. Sekretariat Dewan Gula Indonesia. Jakarta 168 HOW SEVERELY DID THE GLOBAL ECONOMIC CRISIS AFFECT INDONESIAN AGRIBUSINESS EXPORTS? Muhammad Firdaus Department of Economics, Faculty of Economics and Management Bogor Agricultural University
[email protected] ABSTRACT The global economic crisis which started from the end of 2008 was expected to lower the global demand for agricultural products. Data from the Central Statistical Agency, Indonesia, shows that there was a significant decrease in the export value of non-oil and gas products from 2008 to 2010; and a significant increase from 2009 to 2010. Export values of some main exported products such as vegetable and animal oil, rubber, wood, coffee, tea and pepper decreased in almost all destination countries. The panel data method was applied in analyzing the determinants and impacts of the global economic crisis on some of the Indonesian major agricultural exports. This study found that the global economic crisis significantly depressed the commodity price. The volume of some main agricultural exports increased from 2008 to 2009; however, a large drop in commodity price reduced the export value. The panel data model found that the main determinant of Indonesian exports of CPO, rubber and coffee was the export price. The coefficient of economic distance was negative and statistically significant. Keywords: economic crisis , agriculture, export demand, panel data model. INTRODUCTION The global economic crisis began from the financial crisis, when US housing prices started to fall in the winter of 2006. By the summer of 2007, some American and European banks announced huge losses on their mortgage related securities and investments. The Fed started to raise the interest rate up to 5.25%. This process gradually came to a boil in September 2008 when a major American banks, Lehman Brothers, collapsed. Governments in US and EU launched massive bail-outs and fiscal-stimulus to hamper the impact of crisis on the rest of the economy. However, bank credit continued to be almost frozen, leading to sharp falls in consumer spending and real sector activities. The projections made by the IMF indicated that advanced economies such as US and EU experienced negative economic growth from 2008 to 2009. According to the data from the World Economic Outlook Update 2009 by the IMF, US which grew at 2.2% in 2007, dropped to minus 2.4% in 2009 and some EU countries such as UK, Netherlands and Germany slowed from about 3% in 2007 to minus 4% in 2009 (IMF, 2010). 169 The economic downturn in the US and EU countries spread across the world through reduced financial flows such as investment in stock markets, foreign direct investment and through a drop in demand for goods and services such as oil and gas, agriculture, manufactured products and tourism. Thus, the financial crisis not only harmed production in US and EU countries, but also led to drops in exports and production throughout countries which had relied on the US and EU markets fro their export growth. However, some countries are expected to have various experiences in impacts of the global economic crisis, depending on economic structure, integration into the global market and strengths of the economy as seen in foreign reserves, fiscal deficits and external debt (Wiggins, Keats and Vigneri, 2009). The data from the Central Statistical Agency showed there was a significant decrease in export value of oil and gas also non-oil and gas products from Indonesia in 2008 compared to 2009 (14.97%, Table 1). Export values of agricultural products decreased to almost all destination countries. For example, values of Indonesian products in the EU decreased from US $ 14.1 million in the period of January-November 2008 to US $ 12.1 million in the January- November period 2009; in the US, from US $ 11.6 million into US $ 9.4 million. However, export value significantly increased from January up to March 2009 compared to January up to March 2010 (53.7%). These figures indicate that the global economic crisis has had a significant impact on the Indonesian economy. Some further analyses were required to investigate the impact of the global economic crisis on Indonesian agribusiness. This study was aimed to describe some impacts of the global economic crisis on Indonesian exports. Some major agricultural exports such as estate crops were analyzed using the panel data model to capture the determinants of exports and effects of the global economic crisis. TABLE 1. INDONESIAN EXPORT VALUE IN 2008, 2009 AND 2010 (US S MILLION) Year Total Oil and Gas Non Oil and Gas 2005 85,660.0 19,231.6 66,428.4 2006 100,798.6 21,209.5 79,589.1 2007 114,100.9 22,088.6 92,012.3 2008 137,020.4 29,126.3 107,894.2 2009 116,510.0 19,018.3 97,491.7 Change 2008-2009 -14.97 -34.7 -9.6 Jan-March 2009 23,029.2 3,331.6 19,697.6 Jan-March 2010 35,392.3 6,504.3 28,888.0 Change 2009-2010 53.7 95.2 46.7 Source: Central Statistical Agency, 2010 170 THEORETICAL AND EMPIRICAL MODEL According to Massa and te Velde (2008), the recession in some advanced economies was expected to reduce growth in the developing world. The transmission of downturn in advanced to emerging economies included the following process. Firstly, it happened through movements of capital. The stock market fell as foreign investors liquidated portfolios fearing future losses from recession. The official aids reduced as advanced economies faced fiscal deficits. Secondly, it occurred through exchange rate depreciation. Countries that faced large outflows of capital or sharply adverse current account from falling commodity prices might see their currencies depreciated. The weaker currencies would tend to encourage production of exports and to discourage consumption of imports, however it also tended to raise domestic prices. Thirdly, less demand for exports from emerging economies led to drops in commodity prices then reduced earnings. A study by Keats and Vigneri (2009) supported that the global economic downturn would lead to less demand for agricultural commodities, although for some foods the effects will be minor given the low income elasticity of demand for staples. Stronger effects might be applied for luxury foods such as meat and dairy, for vegetable oils and for industrial inputs such as cotton and rubber. The global economic downturn was likely to reduce international prices of agricultural commodities. The World Bank predicted agricultural prices fell by 21% in 2009, with foods and grains prices dropping more than raw materials prices. Some commodities still experienced a small decrease in 2010 and some are expected to rise back. Based on the literature indicated, two hypotheses were proposed in this study. The global economic crisis reduced earnings from Indonesian agricultural exports. Determinants of demand for some main agricultural exports were commodity prices, national income, real exchange rates, distance and size of population. To satisfy the objectives of the study, the secondary data from some sources were the data from the Indonesia Central Statistical Agency, Ministry of Trade, and World Outlook from IMF. The panel data of ten OECD countries (US, UK, French, Italy, Germany, Netherlands, Canada, Australia, Japan and Singapore) and five other major importers of Indonesian estate crops for the period of 2005 up to 2009 were employed. The data were interpreted by using descriptive analysis. The data before and after the crisis (2005-2008 and 2009) were compared. To capture the effects of the global economic crisis and to determine the determinants of global demand for some Indonesian estate crops, this study used the gravity 171 model. The gravity model was first proposed by Tinbergen (1962) and refined by Linnemann (1966). Tinbergen's original aim was to account for the factors that explained the size of trade flows between two countries. Two factors were the size of gross domestic product of the exporting and importing country. Linnemann later added the size of the populations of the two trading countries to reflect the role of scale economies. The third factor was the resistance to trade such as costs of transportation, transport time, tariffs, quota and other trade policies. The model became more popular since the introduction of the theoretical gravity model by Anderson and Van Wincoop (2004). Empirically the gravity model has been used largely in explaining the effects of different policies and other determinants of trade flows with the key variables of economic size and distance. De (2009) conducted a study of India‘s trade potential for anticipating the global economic and financial crisis. By employing the gravity model, the author found that the trade facilitation has an important complementary role to play in enhancing India‘s trade after the global crisis. The empirical gravity model in this study is formulated as follow: X it = α it + Z‘ β + ε it (1) Where: X it : Export value of an exported commodity from Indonesia to country i at time t Z : Vector of five exogenous variables which are as follow: 1. Price of exported commodity in US $ (Price); 2. Real Gross Domestic Product of country I (GDP); 3. Real exchange rate of country on US $ (Er); 4. Economic distance from Indonesia to country i (distance in mile times world oil price), and 5. Dummy of the global economic crisis (1 for year 2009, an 0 for others). The equation 1 was estimated using both Fixed-effects model (LSDV) and Random-effects model. To find the most robust model, the Hausman test was conducted (Hsiao, 2004; Verbeek, 2007). To capture the effect of global economic crisis, the panel data model employed the two-way error components. RESULTS AND DISCUSSION Indonesian Agribusiness Exports Before and after the Global Economic Crisis Based on the data from Ministry of Trade and Central Statistical Agency, the development of Indonesian agribusiness exports from 2005 up to 2009 are presented in Appendix 1. Agribusiness products contributed about 28.6% of non-oil and gas export values in 2009. 172 Vegetable oil and fat was the main contributor. Its share was 12.5% of the total values. Vegetable oil export mainly comes from crude palm oil (CPO). Some other estate crops such as rubber and its fractions, cocoa, coffee, tea and pepper contributed 7.8 % of total values. These commodities then are analyzed by using the panel data model, which are presented in the next section. Table 1 shows the development of export value of Indonesian agribusiness from 2005 up to 2010. Overall the average growth of export value of agribusiness products was 20.68% annually. The decrease in export value in 2009 caused the growth of export value to become minus 10.61% from 2008 to 2009. Furthermore the data in Table 1 shows that export value of agribusiness products increased at rate of 20.13% from January up to February 2010 compared to January up to February 2009. The comparison among commodities shows that Vegetable and animal oil and fat experienced the highest growth for the period of 2005 up to 2009 (47.96%), followed by Food waste products, Milk, margarine and eggs and other food processing products. A significant increase also was experienced by Vegetable and animal oil from January up to February 2010 compared to January up to February 2009. Based on these figures, it can be concluded that the global economic crisis had a significant effect on Indonesian agribusiness exports. The export values of agribusiness products decreased from 2008 to 2009 and then increased from 2009 to 2010 significantly. Effects of the Global Economic Crisis on Export of Main Agricultural Products The further analysis will focus on exports of some estate crops. There are three estate crops that are categorized as the main Indonesian agricultural products. They are crude palm oil (CPO) which represents the export of vegetable oil; rubber and its fractions (rubber) and coffee. In this study, 15 main destination countries are selected for each of commodity. Some OECD countries such as US and Western Europe are always included as the main destination for each commodity observed. Table 2 below shows the development of export volume and price of CPO from 2005 up to 2009 in 15 destination countries including India as the main destination and the US as the trigger of the global economic crisis. The volume of exports of CPO increased from 2005 to 2008 in all destinations (13.4% in 15 countries and 81.9% in the US market). From 2008 to 2009, the volume of exports of CPO in 15 countries grew at a higher rate of 21.4% and a still plus 32.5% in the US market. However, the price of CPO decreased from 2008 to 2009 in all 173 destinations. The price fell from 0.59 US $ per kg in 2008 to 0.43 US $ per kg in 2009. The drop in CPO price led to a decrease in export value of minus 11.2%. TABLE 2. GROWTH OF EXPORT VALUE OF INDONESIAN AGRIBUSINESS PRODUCTS, 2005-2010 HS Commodity 2006-05 2007-06 2008-07 Average 2000-05 2009-08 2010-09 a 15 Vegetable and animal oil and fat 22.61 68.48 52.78 47.96 -21.79 32.46 40 Rubber and its fractions 55.23 13.07 22.22 30.18 -35.67 10.19 44 Wood and its fractions 7.85 -6.78 -7.94 -2.29 -18.70 50.21 3 Fish and shrimp 7.91 4.88 14.12 8.97 -13.06 1.51 18 Cocoa 27.99 8.09 37.30 24.46 11.39 3.41 9 Coffee, tea and pepper 16.98 12.63 40.09 23.23 -13.74 -11.97 47 Pulp 20.57 -5.18 33.44 16.28 -39.04 14.89 24 Tobacco 4.97 24.99 19.80 16.59 17.06 30.04 16 Meat and its fractions 13.73 19.96 33.17 22.29 6.67 1.19 52 Cotton 3.03 -10.44 -5.31 -4.24 -20.45 29.67 19 Powder and its fractions 5.90 13.20 27.85 15.65 6.52 48.65 8 Fruits 9.56 23.96 7.93 13.82 -13.54 5.56 23 Food waste products 15.78 90.15 34.01 46.64 -42.88 12.61 21 Other food processing products 24.23 40.86 39.97 35.02 6.76 43.69 31 Fertilizer 13.64 12.46 -25.81 0.10 36.94 53.12 4 Milk, margarine and eggs -4.50 13.27 111.57 40.11 -28.20 -3.12 Average 16.17 20.19 25.67 20.68 -10.61 20.13 Note: a. Data on January-February 2010 and 2009 Source: Ministry of Trade and Central Statistical Agency (2010) The trend of export volume and price of rubber from 2005 up to 2009 in 15 destination countries are presented in Table 3. In this case, US is the main destination of Indonesian rubber, followed by Japan. The volume of exports of rubber grew at a positive 5.41% from 2005 to 2008 in all destinations, but at minus 2% in the US market. From 2008 to 2009, both volume and price of export of rubber in 15 countries decreased. The drop in both volume and price of rubber led to a significant decrease in export value of minus 11.2%. TABLE 3. TREND OF EXPORT VOLUME AND PRICE OF INDONESIAN CPO, 2005-2009 Year Weight (Ton) Price (US $/Kg) Value (US $) 2005 8,714,615.2 0.30 2,618,303,088.3 2006 9,744,791.0 0.31 3,055,144,123.3 2007 9,838,661.5 0.50 4,878,718,116.3 174 2008 12,537,379.3 0.59 7,434,458,193.8 2009 15,221,215.8 0.43 6,600,788,532.4 Growth 15 countries 2005-2008 13.4 27.4 42.9 2008-2009 21.4 -26.9 -11.2 India 2005-2008 25.0 26.3 60.3 2008-2009 14.8 -27.6 -16.9 US 2005-2008 81.9 30.5 116.4 2008-2009 32.5 -28.9 -5.7 Note: The rests of destination are: China, Netherland, Pakistan, Malaysia, Singapore, Bangladesh, Germany, Ukraine, Egypt, Italy, Spain and South Africa Source: Ministry of Trade and Central Statistical Agency (2010) TABLE 4. TREND OF EXPORT VOLUME AND PRICE OF INDONESIAN RUBBER, 2005-2009 Year Weight (Ton) Price (US $/Kg) Value (US $) 2005 1,738,270.5 1.09 1,887,762,721.5 2006 1,933,162.6 1.56 3,013,733,618.0 2007 2,099,535.9 1.62 3,396,639,075.2 2008 2,024,328.0 2.03 4,116,875,511.4 2009 1,724,476.8 1.27 2,189,476,662.5 Growth 15 countries 2005-2008 5.4 24.3 31.2 2008-2009 -14.8 -37.6 -46.8 US 2005-2008 -2.0 24.2 20.4 2008-2009 -36.8 -37.1 -60.2 Japan 2005-2008 16.4 27.9 50.5 2008-2009 -31.9 -35.9 -56.3 Note: The rests of destination are: China, Singapore, Korea, Canada, Germany, Brazil, French, Spain, Netherland, Italy, India, Turkey and South Africa Source: Ministry of Trade and Central Statistical Agency (2010) Table 4 shows the development of export volume and price of coffee from 2005 up to 2009 in 15 destination countries. US is the main destination, followed by Germany. Overall the volume of export of CPO increased from 2005 to 2008 in all destinations at the rate of 7.18% and at the rate of 1.11% from 2008 to 2009. The price and value of coffee exports experienced the same trend with CPO. The coffee price decreased from 2008 to 2009 which 175 led to a significant decrease in export value. In the US market, the trend of export volume of coffee from 2005 to 2008 was minus, because there was huge drop of export volume from 2006 to 2007. From the figures in Tables 2, 3 and 4, it can be concluded that there were significant decreases in the values of main Indonesian agricultural exports (CPO, rubber and coffee) from 2008 to 2009. This drop was mainly cause by a decrease in export prices rather than export volumes. As mentioned in the previous section, the global economic crisis led to a lower demand for agricultural products which decreased the world commodity prices. TABLE 5. TREND OF EXPORT VOLUME AND PRICE OF INDONESIAN COFFEE, 2005-2009 Year Weight (Ton) Price (US $/Kg) Value (US $) 2005 366,520.8 0.94 344730431.8 2006 345,880.5 1.11 384638732.6 2007 268,016.6 1.43 384008500.2 2008 401,185.9 1.54 619553759.5 2009 405,654.5 1.16 469436244.2 Growth 15 Countries 2005-2008 7.18 18.29 24.25 2008-2009 1.11 -25.06 -24.23 US 2005-2008 -7.4 14.6 4.7 2008-2009 9.0 -15.7 -8.1 Germany 2005-2008 18.7 23.0 38.7 2008-2009 -12.0 -29.0 -37.5 Note: The rests of destination are: Japan, Italy, Algeria, UK, Belgium, India, Egypt, Malaysia, Philippines, Georgia, Rumania, Australia Source: Ministry of Trade and Central Statistical Agency (2010) Determinants of Indonesian Agricultural Exports and Effects of Global Economic Crisis The results of estimation of the panel data model for each of the commodities are presented in Table 5. The diagnostic test indicated that the Random-effects model was the most robust one for all commodities observed. For the CPO model, the global economic crisis reduced the exports of Indonesian CPO statistically. This is indicated by the minus coefficient of crisis dummy with p-value less than 0.05. The effect of global economic crisis was also negative on the exports of Indonesian rubber and coffee. The coefficients of that effect have p-value of 0.085 and 0.111 for rubber and coffee. 176 The estimation of panel data indicated that the main determinant of export values of CPO, rubber and coffee is price. For CPO and rubber, 1% decrease in export price will reduce export values of 1.50% and 1.56%. This means that export value is elastic to changes in export price. As mentioned in the previous section, the global economic crisis lowered the commodity prices. Thus even though the export volumes increased from 2008 to 2009, the lower price decreased the export value of CPO, rubber and coffee. The gravity model used in this study included the distance among exporter and destination countries. The panel data model showed that economic distance affected the export value significantly. An increase of 1% in transportation cost reduced the export value of CPO (0.03%) and the export value of rubber (0.73%). The effect of transportation cost on CPO was relatively small because of very high demand for Indonesian CPO. Based on UN- Comtrade data, in 2009 Indonesia was the largest exporter of CPO in the world. The effect of the real exchange rate on export value was positive. However, the coefficient of the real exchange rate effect is statistically significant only in the coffee model. This may be related to high competition in the world coffee market. For the other two commodities, CPO and rubber, Indonesia still dominated the world exports. An increase of 1% in the real exchange rate of a destination country would increase by 0.18% the export values of coffee, because the demand for coffee in that country. TABLE 6. RESULTS OF ESTIMATION OF PANEL DATA MODEL Variable CPO Rubber Coffee Price 1.4950 a (.0.000) b 1.5607 (.0.000) .7581 (.0.000) GDP -.0311 (.0.872) .6726 (.0.000) .2846 (.0.001) Er .0610 (.0.630) .0281 (.0.749) .1835 (.0.014) Distance -.0285 (.0.006) -.7342 (.0.009) .4907 (.0.006) Crisis -.3222 (.0.018) -.1268 (.0.111) -.1354 (.0.085) R-sq: within between overall Wald chi2 (5) Prob > chi2 0.6194 0.7898 0.7748 134.91 0.0000 0.6194 0.7898 0.7748 97.19 0.0000 0.6194 0.7898 0.7748 129.36 0.0000 Note: a. Estimated parameter b. P-value 177 CONCLUSIONS The global economic crisis had a significant effect on Indonesian agribusiness exports. This was indicated by a significant decrease in export values of agribusiness products from 2008 to 2009 and a significant increase from 2009 to 2010. The change in export values related to a fluctuation in export prices in 2009 and 2010. The effect of global economic crisis on Indonesian exports of CPO, rubber and coffee was negative and statistically significant. The panel data model found that the main determinant of Indonesian exports of CPO, rubber and coffee was export price. The coefficient of economic distance was negative and statistically significant in CPO and rubber models. 178 REFERENCES Anderson, J. E., E. V. Wincoop, 2004, Trade Costs, Journal of Economic Literature, Vol. XLII, No. 3, pp. 691-751. Central Statistical Agency. 2005-2010. Export Import Data. Jakarta. De, P., 2009, Global Economic and Financial Crisis, RTNeT Working Paper Series No.6. Hsiao, C., 2004, Analysis of Panel Data, Cambridge University Press, UK. Linnemann, H, 1966, An Econometric Study of International Trade Flows. Amsterdam: North, Holland. Massa, I., D. W. te Velde, 2008, The Global Fincancial Crisis: Will Successful African Countries be Affected? Background Note, December. UN-Comtrade. 2009. World Trade Data. Verbeek, M., 2007, Modern Econometrics, John Wiley and Sons Inc., US. Wiggins, S., S. Keats and M. Vigneri, 2009, Impact of the Gobal Financial and Economic Situation on Agricultural Markets and Food Security, Overseas Development Institute Working Papers No. 314, February. 179 Appendix 1. Export of Indonesian Agribusiness Products, 2005-2009 (US $ Million) HS Commodity Share (%) a 2005 2006 2007 2008 2009 15 Vegetable oil and fat 12.53 4,950.6 6,069.9 10,226.8 15,624.0 12,219.5 40 Rubber and its fractions 5.04 3,560.0 5,526.2 6,248.7 7,637.3 4,912.8 44 Wood and its fractions 2.40 3,111.3 3,355.6 3,128.2 2,879.8 2,341.2 3 Fish and shrimp 1.75 1,522.5 1,642.9 1,723.0 1,966.3 1,709.5 18 Cocoa 1.45 668.0 855.0 924.2 1,268.9 1,413.4 9 Coffee, tea and pepper 1.29 787.0 920.6 1,036.9 1,452.6 1,253.0 47 Pulp 0.89 934.2 1,126.4 1,068.1 1,425.3 868.8 24 Tobacco 0.61 323.7 339.8 424.7 508.8 595.6 16 Meat and its fractions 0.55 278.9 317.2 380.5 506.7 540.5 52 Cotton 0.54 755.0 777.9 696.7 659.7 524.8 19 Powder and its fractions 0.32 188.1 199.2 225.5 288.3 307.1 8 Fruits 0.27 206.1 225.8 279.9 302.1 261.2 23 Food waste products 0.25 146.4 169.5 322.3 431.9 246.7 21 Other food processing products 0.24 91.2 113.3 159.6 223.4 238.5 31 Fertilizer 0.23 171.6 195.0 219.3 162.7 222.8 4 Milk, margarine and eggs 0.22 133.4 127.4 144.3 305.3 219.2 Total Agribusiness Products 28.6 17,828.0 21,961.7 27,208.7 35,643.1 27,874.6 Total Non Agribusiness Products 71.4 48,600.4 57,627.4 64,803.6 72,251.1 69,617.1 Note: a. Share on total Indonesian non-oil and gas exports at 2009 Source: Ministry of Trade and Central Statistical Agency 180 STRATEGY FORMULATION TO TRANSFORM COMPARATIVE ADVANTAGE INTO COMPETITIVE ADVANTAGE AS A RESPONSE OF GLOBAL CRISIS: CASE STUDY AT EMPING MELINJO BUSINESS IN SARI SONO COOPERATIVE , INDONESIA. Firdiyansyah Romadhona and Adeline Puspitasiwi Agribusiness Department Bogor Agriculture University West Java Phone +6285691522731
[email protected] ABSTRACT Changes in the strategic environment caused by the economic crisis engulfing the world in 2007-2008 requires a change on how to operate a business. Business that can survive is a local resource-based business that has a comparative advantage. One potential commodity is melinjo. Generally melinjo commodities in Indonesia have a comparative advantage due to abundant production and low level of product prices compared to other countries. In fact, comparative advantage needs to be transformed into competitive advantage by paying attention to quality, continuity of supply and diversity of products. Business development strategies that are based on the principle of cooperatives is expected to help realize the comparative advantage into competitive advantage. Keywords: Economic Crisis , Comparative Asvantage, Competitive Advantage, Cooperatives, Strategic Business Development, Emping Melinjo. INTRODUCTION The global crisis shook the world in 2007-2008. Starting from the United States, then having an effect on various countries, including Indonesia. The world economic recession was marked by an increasing level of unemployment, reduced purchasing power, and declining net exports. Net exports of Indonesia were only 8 percent of GDP, so the impact is relatively small compared to countries with greater levels of export dependence 1 . As a tropical country, Indonesia has a wealth of natural resources and comparative advantage to produce a variety of tropical agricultural products that cannot be generated by non-tropical countries (Saptana, et al., 2009). According to Law No. 25 year 1992, the basic understanding of a cooperative is a business entity consisting of the person or legal entity with the bases of cooperative activities based on cooperative principles as well as a popular economic movement based on the basic principle of kinship. It was explained that members of cooperatives are the owners as well as customers of those institutions. This difference was seen with the economic units that are owned and democratically controlled together with the sole aim of serving the needs of members (Hanel, 1992, pp.33-42 in Baga M. Luqman, 2005). Therefore, the Cooperative has the advantage of facing a global crisis, related to self-sufficiency in the supply of raw materials, capital, and business. One of the surviving cooperative that can face a global crisis is Sono Sari Cooperative located in Village Warunggunung, Rangkasbitung. This cooperative 181 focuses on the production of emping melinjo. Gnetum Gnemon LINN, also called a tulip tree, is found throughtout the islands of the Indonesian archipelago. Locally, this tree is known as the melinjo tree. Ripe fruits are used in a traditional dish. The seeds of the ripe fruits are eaten after roasting. The seeds may also be processed in household-food industries into flattened and dried emping flake called emping melinjo (Geertruide SIH, 1992). Raw materials of emping melinjo come from melinjo which are native plants of the tropics. This plant is widely available in Indonesia, especially in the province of Banten. Melinjo which have a different utility and can become food industry raw materials, pharmacy and dressings (Indonesian Directore of Horticulture, 2010). In Indonesia, the added value generated from emping melinjo is only restricted because of limited technology, research and development. Emping melinjo from the Province of Banten has penetrated the European market, the Middle East and southeast Asia (Department of Industry of Banten, 2010). This business could survive through the crisis years of 2007-2008 because the local commodity-base and has its own local market. Total raw materials in production of emping melinjo are derived from domestic production and consumption. In addition, this business has a permanent customer base in the country thus ensuring continuity of product demand. The economic crisis has only a small impact for businesses, because the cooperative has a comparative advantage in business, in the use of local raw materials. Howeverr, comparative advantage alone will not guarantee sustainability in the long term. Innovation is needed to create a competitive advantage in the business to create higher added value than emping melinjo (Saptana, 2008). Consumers will get another added value of melinjo, not only produced from the emping, but also innovative food products for industry, pharmacies and dressings. To transform the comparative advantages into competitive advantage it needs the right business development strategy. Formulation of a strategy is done by considering the internal and external business conditions. METHODOLOGY The study uses descriptive methods that explain (research explanatory). Sugiyono (1999) describes that explanatory research is to solve a problem with respect to the variable itself. Descriptive analysis is used to determine the condition of Sono Sari Cooperative business processing of emping melinjo. The data used are primary and secondary data from the internal and external environment of the cooperative. Data types are classified into primary data and secondary data. Primary data is data derived from original sources and was specifically collected to answer the research questions (Soeratno and Arsyad, 2003). The primary data was obtained through direct observation, interviews with cooperative stakeholders (members of Sari Sono Cooperative and melinjo farmers), and the completion of questionnaires by the chairman and manager of production. Secondary data was obtained through the agency-related information providers, among others, previous research reports, literature, books and websites that were relevant. Internal analysis was done by using value chain analysis. The macro environment was analyzed using a PEST analysis. While the industry environment analysis was based on Porter's theory. 182 Respondents for the questionnaire were selected purposively on the basis that the respondent is a person who knows and understands clearly about the conditions of the cooperative. Data obtained from questionnaires were analyzed using a matrix analysis tool IFE, EFE, IE, and SWOT. RESULT AND DISCUSSION FIGURE 1. MELINJO INDUSTRY TREE Usefulness Melinjo Figure Picture above explained that each section has its uses melinjo tree. The leaves are used for consumption, on young leaves and seeds Indonesian young melinjo is used to make a vegetable. Melinjo wood is used for building materials, melinjo seeds have benefits for the pharmaceutical, food industry, and dressing. Melinjo seeds contain substances that could be useful for stiilbenoid antioxidants and antimikroba 2 . In Japan, the development melinjo is at the the stage of developing into capsules and tablets which are used as supplements. Melinjo seeds produce flour used as raw materials and produce snack cake makers, emping melinjo (Melinjo chips). Emping melinjo (melinjo chips) in Indonesia are a traditional food liked by all levels of society. The development of the food industry, making the melinjo seeds have added value can be made with tea, soy, and saous. Sari Sono’s Cooperative Profile The focus business of Sari Sono cooperative is efforts on processing melinjo into emping melinjo. Raw materials of melinjo, processing equipment, all labor are from domestic production so that businesses are not affected by the global crisis. Melinjo is a tropical plant, so it is suitable to grow in Indonesia which is in the tropics. Among the industrial centers of emping melinjo, Banten Province is relatively large in Indonesia. Centers are scattered in almost all districts in Banten. By the end of 2004, the overall land area in Banten Province melinjo was approximately 6.610 ha with 14.011 tonnes of fruit production of melinjo. Approximately 48% of the land was in Pandeglang, the rest is scattered in Lebak and Serang. Sari Sono Cooperative is located in Banten province which is the center of production of melinjo (Plantation Office Banten, 2010). Indonesia has a comparative advantage for melinjo. Leaves Melinjo Steam Seeds Pharmacy yycyy Food Industry Dressing Stilbenoi d Capsul e Tablet Flour Sauce For vegetable Emping Melinjo 183 Commodity-based business will be relatively resistant to external shocks, particularly of the economic crisis. However, a comparative advantage in business is not enough to guarantee long-term business success. To be able to survive, then the employer needs to transform comparative advantage into competitive advantage with innovation in both product and process. In general, the problems of agribusiness in Indonesia are that there is not yet realization of the continuity of supply, and quantity in accordance with market demand or consumer preferences. In other words, a business transformation is required to turn a comparative advantage into a competitive advantage. (Saptana et al., 2004). Internal Environmental Analysis of Cooperative Sari Sono Internal activities of cooperatives were analyzed by using the value chain concept. The value chain of a company and the activities in it represents all corporate activities such as design, production, marketing, product delivery and product support activities. Differences between value chains of competitors is a source of strength in the competition (Advantage Competitive). Value activities can be divided into two general groups of Primary Activities and Support Activities (Porter, 1994). a. Primary Activity Inbound logistic associated with the procurement of production inputs. The input for emping product is melinjo fruit that is sold at Rp 4500-6000 per kilogram. FIGURE 2. PROVISION OF LOGISTICS FOR BUSINESS GROOVE EMPING MELINJO COOPERATIVE SARI SONO TABLE 1. FARMER COST FOR CULTURE, MAINTENANCE, AND HARVEST MELINJO PLANT Farmer Cost Cost (Rp) Seeds 800.000/Ha Fertilizer 50.000/Ha Total Of Culture and Maintenance 850.000/Ha Harvest 800/Kg Peeling 500/Kg Basket Bamboo/ Sack 1.000/Kg Total Cost of Harvest Time 2.300/Kg Sari Sono Cooperatives' operations can be evaluated in terms of production, packaging, equipment maintenance and quality assurance. FIGURE 3. PRODUCTION FLOW OF EMPING MELINJO IN COOPERATIVE SARI SONO Melinjo Maintenance Harvest Sorting Peeling Skin Melinjo Member Of Sari Sono Sari Sono Melinjo Seed Member and Farmer 184 Production of a emping melinjo requires 4-5 melinjo seeds. This sum is higher than its competitors, which consists of 2-3 melinjo seeds. The production process has not applied the best operational standards.. TABLE 2. TOTAL COST OF MAKING EMPING MELINJO Cost Component Cost (Rp/Kg) Cost Labour @ Rp 3.000 Seeds Melinjo @ Rp 6.000 6.000 12.000 Total 18.000 Packaging is still simple in the form of plastic with just a paper label of Sari Sono cooperative emping melinjo super. Packaging is not neat and labels do not include information and is incomplete, nutrient values and food security numbers are not included.. Packaging costs per kilogram are Rp 466. The equipment used is simple. The price of Rp 50.000 talenan wood (USD 4.5), iron/halu bat Rp 75.000 ( USD 8), hammer shell for peeling Rp 15.000 ( USD 1.5), fiber Rp 1.000 (110 cent), and firewood. Fiber is replaced every once a week to maintain the flatness emping. Almost all entrepreneurs in emping melinjo do not care for the equipment. Production of emping melinjo Sari Sono Cooperative has obtained a health certificate from BPOM with registration number No HK. 00.05.5.1640 and Health license fees - No IRT. 215 360 1080 05. Raw materials used in the production are of good quality and the age of melinjo is quite old and the outer skin is red. Logistics activities are associated with storage, shipping operations and promotions. Ready- to-sell emping melinjo that are put in the store and warehouse are owned by each member of Melinjo Seed Warming with Sand Put in Anyak Peeling Melinjo Skin Take From The Umpak Pounded Dried Emping Melinjo 185 the cooperative Sari Sono. Sales are made directly or indirectly. The direct mode occurs when the buyer comes directly and transacts with the cooperative with the purchase amount of less than 1 quintals. Indirect purchases occur when the prospective buyer orders by phone with a minimum purchase of one quintals. Delivery of goods is done by car or cars losbak customers. Promotion is done but is still not effective enough, by relying on the business board. b. Supporting Activities Sono Sari business is incorporated in the form of cooperatives approved by the legal entity registration number, SKU (Operating Certificate), SIUP (Permit Trading), TIN (tax payer registration number), SITU (place of business permit), TDP (company registration number), health department permits and licenses of BPOM. Financial recording has not been managed well. Workforce which is owned by a well-trained labor force numbering 124 men. Each employee undergoes training for one week to produce emping melinjo with standard quality. Most manufacturers in Banten did not use production process technology and focus on product quality assurance, as well as product design and packaging. Sari Sono Cooperative does not have advantages, especially in packaging products. External Environment Analysis Of Coop Sarisono Melinjo is included in the category of plantations. NTP average plantation crops tend to increase, in October 2008 to October 2009 this has increased from 96.03 9.87 to 105.9. This is supported by a declining inflation rate in October 2008 to October 2009. In early 2010 the inflation rate increased from December 2009, so that the NTP was reduced from 105.36 to 104.79 (BPS Banten province, in 2009 and www.bi.go.id). Melinjo have a lot of good nutrients for health. Unfortunately, many people do not realize melinjo nutritional content. Stigma negative says that melinjo causes uric acid and this makes many people reluctant to consume emping melinjo. Purine content in melinjo is the trigger, if consumed excessively. Melinjo efficacy has not been widely known to the public so that socialization and effective marketing is necessary. During the period 2005-2009 the population of Indonesia is constantly increasing (CBS, 2009). This is a business opportunity for the food businesses such as emping melinjo. Besides, with Asean-China Free Trade Agreement in 2010, then the boundary trade between countries to have zero protection. As a result of domestic competition increases because of influx of products from abroad, local entrepreneurs are required to produce innovative products in order to compete with foreign products. Indonesia benefits from its abundant natural resources. Many Indonesian products that have comparative advantages are not owned by other countries. Local producers of emping melinjo are scattered in the areas of Menes, Serang, Cilegon, and Rangkasbitung with household scale production. Most production is by an individual producer that has a low production capacity. Sari Sono Cooperatives has strength because it combines people, bringing total capacity to be a greater amount. However, the possible entry of new entrants of competitor is high. Barriers to entry of emping melinjo industry almost do not exist, in terms of economies of scale. Product substitution is kerupuk (common cracker). Emping melinjo has separate segments when compared with the common crackers, so there is no threat of substitute products for businesses. Suppliers of raw material are farmer melinjo 186 members and non members of the Sari Sono Cooperative. A large number of suppliers will ensure business continuity. Formulation strategies Strategic management is a set of managerial decisions and actions that determine the long- term performance of an organization [Hunger and Wheelen, 1996]. In terms of strategy formulation. David (1996) divided the process into three phases of activity, namely: input stage, matching stage, ande decision stage. Input Stage Using EFE IFE Matrix Analysis of the EFE Matrix of Sari Sono Cooperative generates a value 2.283 which shows that the average cooperative capabilities to respond to external situations that exist. TABLE 3. EFE MATRIX OF SARI SONO COOPERATIVE VARIABLES Weight Rating Score Opportunities A Number of local market potential for marketing emping melinjo 0.076 2.5 0.196 B Improved National Economy 0.058 2 0.116 C Supports government's policy-based Business Cooperation with Local Commodities 0.062 1.5 0.092 D The existence of loyal customers 0.079 2 0.157 E Public awareness on food safety 0.084 2 0.167 F Availability of Suppliers to business 0.08 2.5 0.2 G Number of potential consumers domestic and international 0.064 3.5 0.224 H Export opportunities are still open wide with the enactment ACFTA 0.081 3.5 0.284 I Cooperation in melinjo development between Japan and Indonesia 0.069 2 0.138 J Existence of many different varieties of melinjo with higher productivity 0.052 3.5 0.18 Threats K Negative opinion of society to melinjo 0.072 2 0.143 L Competitors that applying packaging technology 0.06 1.5 0.091 M Fluctuations of raw material availability due to tree melinjo felling 0.048 2 0.095 N Ease newcomers into the industry 0.061 1.5 0.092 O The Increase of Raw Material Price 0.054 2 0.108 TOTAL 1 2.283 IFE matrix analysis showed the results of which show Sari Sono Cooperative 2.546 has a normal internal conditions 187 TABLE 4. IFE (INTERNAL FACTOR EVALUATION) MATRIX SARI SONO COOPERATIVE VARIABLES Weight Rating Score Strengths A Specific vision and mission of cooperative business emping melinjo 0.041 3.5 0.144 B Production has traditionally been carried out by trained manpower 0.053 3 0.161 C The quality of raw materials and products 0.095 4 0.38 D Production focus only on emping melinjo 0.062 3.5 0.215 E Production capacity emping melinjo is big enough because it is a combination of members 0.055 3.5 0.193 F Loyalty members in developing the sari sono cooperative 0.07 4 0.28 G Access to raw materials and adequate availability of melinjo seeds 0.077 3 0.231 H Legality completeness of business (trade, tax, and healthy license) 0.057 3 0.169 Weakness J Financial recording which is still simple 0.079 2 0.157 K Limited distribution of network marketing 0.075 1.5 0.112 L Limitations on venture capital 0.097 1 0.098 M Lack of customer service 0.089 2 0.179 N Packaging products does not standart yet 0.078 2 0.157 O Lack of promotional activities 0.072 1 0.072 Total 1 2.546 188 2,0 FIGURE 4. POSITION MAPPING SARI SONO COOPERATIVE USING IE MATRIX Matching Steps Use IE (Internal-Ekternal) matrix and SWOT analysis. The mapping of with IE matrix indicates the cooperative is in the fifth cell matrix. This position shows the cooperative is in the hold and maintain area, so it is appropriate to apply market penetration and product development strategy. TABEL 5. SWOT MATRIX OF SARI SONO COOPERATIVE 1,0 2,283 3,0 2,546 4,0 3,0 2,0 Strong 3,0 - 4,0 1,0 Strong 1,0 - 1,99 High 3,0 - 4,0 Middle 2,0 – 2,99 Low 1,0 – 1,99 I III IV VI II VIII VII IX V Average 2,0 – 2,99 189 Strengths – S 1. The quality of raw materials and products 2. Loyalty members in developing the Sari Sono Cooperative 3. Access to raw materials and adequate availability of seeds melinjo 4. Product focus only on emping melinjo 5. Production capacity emping melinjo big enough because it is a combination of members Weakness – W 1. Lack of customer service 2. Packaging products doen not standart yet 3. Financial recording which is still simple 4. Network marketing is still limited distribution Opportunities - O 1. Export pportunities are still open wide with ACFTA enactment 2. Number of potential consumers domestic and international 3. Availability of raw material suppliers 4. Number of local market potential for marketing emping melinjo 5. Many different varieties of melinjo with higher productivity Strategi S-O 1. Market penetration and increase the distribution network to expand its market reach (S1, S2, O1, O2, O4, O5) 2. Increase the promotion and strengthening brand image as a super-product emping (S1,,O1,O2,O4) Strategi W-O 3. Improving the quality of packaging (W2, O1, O2, O4, O5) 4. Increasing serve to consumers to get potential consumers (W1, W2, O2) Threaths - T 1. Negative opinion of society to melinjo 2. Increase of raw material price 3. Fluctuations availability of raw material due to melinjo tree felling Strategi S-T 5. Provide education regarding melinjo and emping to consumers (S3, S4, T1) Strategi W-T 6. Effectiveness network distribution to get potential profit (W4, O1,O2,O4) S-O Strategy Market Penetration and Increase The Distribution Network To Expand Its Market Reach Legality completeness of business (trade, tax, and healthy license) will make it easier for product emping melinjo to enter into the modern market. A distribution network is very important so that the level of production can be increased by Sari Sono Cooperative, so that the local society and the economy can increase too. Market scope can be expanded by increasing the promotion, as an example, by attending various exhibitions, socializing through internet media, in cooperation with relevant government institutions such as Offices EXTERNA L INTERNA L 190 of Small Medium Enterprises, the Official Industry and Trade Province of Banten in developing a marketing strategy.. Increase the Promotion and Strengthen the Brand Image As A Superior -Product Emping Product emping melinjo Sari Sono Cooperatives is well-known as superior emping melinjo with large size and high quality production. Product positioning should be maintained in order to reach a larger market. Strengthening positioning can be done through increased promotion of products, by attending various exhibitions, socializing through internet media, in cooperation with relevant government institutions such as The Official of Small Medium Enterprises, the Official Industry and Trade Province Banten in developing marketing W-O Strategy Improvement Of Packaging Quality The main function of packaging is to provide protection to the food since packaging is a marketing tool that can increase the value-added products and as a means of providing information about the packaged product (Suyitno, in B. Rahardjo 1993). Improving the quality of the product packaging of emping melinjo lies in two areas. The first field is the use of technology to protect the best product. The second field is product labeling to provide accurate information for consumers. Increasing of service to consumers to get potential customers. Consumers do not only just buy the product but also buy service. Therefore with the strength of Sari Sono, there are opportunities to get potential consumers, big opportunities to export products . Increasing service with delivery of orders so that consumers can just order by phone and receive home delivery.. S-T Strategy Provide Education About Melinjo And Emping To Consumers The first objective is to educate consumers about the quality of the product produced by Sari Sono Cooperative. The second objective is to provide an understanding of the benefits that are contained in emping melinjo to eliminate the negative opinions about melinjo that exist in today's society. The ultimate goal of providing education to consumers is the act of purchasing Sari Sono cooperatives emping melinjo. W-T Strategy Effectiveness network distribution to get potential profit The purpose of the strategy is to provide an effectiveness distribution to get potential profit. In this W-T situation, Sari Sono needs a defensive strategy like an effective distribution network to get potential profit. Surveillance carried out by maximizing the cooperative management of resources for the cooperative is needed to achieve optimum profit. First, cooperatives need to fix the financing record so it can be used as a reference for cooperative development in the future, like proposing bank loans.Second, the cooperative need management of raw materials to ensure continuity of supply. This is related to the issue of limiting the number of melinjo trees caused by felling so that the raw material is fluctuates and can threaten the business. CONCLUSIONS 191 A business that can survive in an economic crisis is a local resource-based business that has a comparative advantage. Indonesia has a wealth of natural resources and comparative advantage to produce a variety of tropical agricultural products that can not be generated by non-tropical countries. One potential commodity is melinjo. This plant is widely available in Indonesia, especially in the province of Banten. One of the producers that produces emping melinjo is Sari Sono Cooperative. This cooperative has strengths, weaknesses, opportunities, and threats in its business. To face a global crisis, comparative advantage needs to be transformed into competitive advantage by paying attention to quality, continuity of supply input and product diversity with right formulation of a business strategy. Position mapping of Sari Sono Cooperative using an IE Matrix indicates that the cooperative is in the fifth cell matrix (2,546; 2,283). This position shows that the cooperative is in the hold and maintain area, so it is appropriate to apply a market penetration and product development strategy. Sari Sono Cooperative has average internal conditions, and average capabilities to respond to external situations that exist. .A SWOT matrix is used to formulate business strategy. The most appropriate strategy for Sari Sono Cooperative are market penetration and increasing the distribution network to expand its market reach (S-O), increase the promotion and strengthening brand image as a super-product emping (S-O), improving the quality of packaging (W-O), Increasing serve to consumers to get potential consumers (W-O), provide education regarding melinjo and emping to consumers (S-T) and an Effectiveness network distribution to get potential profit (W-T). 192 REFERENCES [BI] Bank Indonesia. 2010. Pembiayaan Usaha Emping Melinjo. www.bi.go.id [4 Juni 2010] David, Fred R. 1996. Strategic Management, Prentice Hall International, Inc., the Philippines. Hunger, J. David, dan Thomas L. Wheelen. 1996. Strategic Management, Addison-Wesley Publishing Company, Reading, Massachusetts. Porter, Michael. E., 1994, Keunggulan Bersaing; Menciptakan dan Mempertahankan Kinerja Unggul, alih bahasa: Agus Maulana, Penerbit Erlangga, Jakarta. Rahardjo. B, Setyowati. P, dkk. Model Perubahan Kadar Air Emping Selama Dalam Kemasan Plastik Polipropelin. www.scrib.com. [1 Juni 2010] Republik Indonesia. Undang-Undang Nomor 25 Tahun 1992 Tentang Perkoperasian Saptana, S. Friyatno Dan T.B.H. Purwantini. 2004. Efisiensi dan Daya Saing Usahatani Tebu dan Tembakau Dalam Efisiensi dan Daya Saing Sistem Usahatani Beberapa Komoditas Pertanian Di Ladang Sawah. Pusat Penelitian Dan Pengembangan Sosial Ekonomi Pertanian. Badan Penelitian Dan Pengembangan Pertanian Bogor. Saptana, S. 2008. Keragaman Pakis Indonesia. http://www.pustaka-deptan.go.id/publikasi. [10 Januari 2010] Saptana, S. 2009. Keunggulan Komparatif- Kompetitif dan Strategi Kemitraan. Pusat Penelitian Dan Pengembangan Sosial Ekonomi Pertanian. Badan Penelitian Dan Pengembangan Pertanian Bogor. Soeratno & Arsyad, L. 2003. Metode Penlitian: Untuk Ekonomi dan Bisnis. Yogyakarta: Unit Penerbit dan Percetakan Akademi dan Manajemen Perusahaan YKPN. Sugiyono. 1999. Statistika untuk Mahasiswa. Bandung: CV Alfabeta. 193 APPENDIX 194 195 STUDENTS’ SATISFACTION LEVEL ON THE ENTREPRENEURSHIP EDUCATION PROGRAMS AT THE BENGKULU UNIVERSITY, INDONESIA. Muhamad Abduh Master Program of Management Economic Faculty – Bengkulu University, Indonesia. Phone/Fax: 61 736 21396, Email:
[email protected],
[email protected] Roosemarina A. Rambe Master Program of Development Planning Economic Faculty – Bengkulu University, Indonesia. Phone/Fax: 61 736 21396, ABSTRACT This paper presents the results of a study designed to investigate students’ opinions and satisfaction on an entrepreneurship education program at Bengkulu University. The data collected from 150 students using a questionnaire were analyzed using descriptive analysis techniques and the SatMat model developed by Abduh et al (2007). The results indicated that students varied on their satisfaction on the program. The study also identified several useful teaching methods as perceived by the students. This paper also discusses the implications of the findings and then provides several recommendations aimed at improving the entrepreneurship education program as well as topics for future research. INTRODUCTION One of the significant economic development issues currently faced by Indonesia including Bengkulu Province is an increasing rate of unemployment especially the unemployment of educated people. In 1994, the unemployment rate of educated people (those with University degrees)was 17% and increased to be 26% in 2004. This economic development problem became even worse in 2008 as more than half (50,3%) of educated people at that time were unemployed (theindonesianinstitute.com, 15 September 2008). The unemployment rate of educated people in the Bengkulu Province also increased every year and became 30% in 2008 (BPS, 2008). As a response to the increasing unemployment rate of educated people, relevant institutions including Bengkulu University have promoted a number of entrepreneurship development programs aimed at encouraging the community including university students to be self- employed. The rationale of the programs lays in the fact that the more people create their their own jobs the less their dependency on the employment market and hence the unemployment rate is assumed to decrease. A strategy used by higher education including the Bengkulu University in encouraging students to be self-employed is through entrpreneurship education by providing entrepreneurship subjects. Entrepreneurship Education at Bengkulu University 196 Entrepreneurship education at the Bengkulu University has been introduced since the 1990s through several types of activities such as seminars, workshops, training, short courses and community services of entrepreneurship. In 2003, Bengkulu University offered its students the entreprenership course as an elective subject. Due to an increasing awareness on the importance of self employment, entrepreneurship was then decided to be a compulsary subject in 2006. As a compulsary subject, entrepreneurship has currently been taught in all seven faculties and must be taken by every student of the Bengkulu University. Since the entreprenurship subject has been offered as a compulsary subject for about three years , it is considered to be the right time to review the development of the implementation of the entrepreneurship subject in terms of the growth of the number of students interested to be self employed and related aspects of the entrepreneurship education such as contents of the subject, teaching methods and expected outcomes. Research Objectives This research was designed to evaluate the development of entrepreneurship education at Bengkulu University. It has several research objectives including the following: 1. to explore the results of entrepreneurship education in Bengkulu University in terms of students‘ motivation to be self employed, 2. to identify students‘ expectation on the entrepreneurship education in terms of subject materials, teaching methods, and outcomes to be achieved, 3. to investigate students‘ opinions on the performance of the practice of the entrepreneurship in terms of subject materials, teaching methods, and achievement of expected outcomes, and 4. to classify the level of students‘ satisfaction on the practice of entrepreneurship in terms of subeject materials, teaching methods, and achievement of expected outcomes. CONCEPTUAL FRAMEWORK Entrepreneurship Entrepreneurship is the process in which one or more people undertake economic risk to create a new organization that will exploit a new technology or innovative process that generates value to others (Schramm, 2006). Organizations resulting from the entrepreneurial process are among other small and medium enterprises (SME). The growth and development of SME have long been regarded as the backbone of the economy in most countries including Indonesia. As a matter of fact, the majority of business units are SMEs, providing significant contribution to jobs creation, and contributing to the formation of national/regional income. Accordingly, stimulating the formation, growth and development of new enterprises is regarded as a strategic policy to strengthen the economic backbone. The strategic policy can be undertaken by many ways including motivating university students to be entrepreneurs through entrepreneurship education. Entrepreneurship Education Entrepreneurship education, according to Katz (2003) in an paper entitled ―The Chronology and Intellectual Trajectory of American Entrepreneurship Education‖, was first taught at Harvard Business School in 1947. Since then, other universities followed offering 197 entrepreneurship courses. For example, New York University offered Entrepreneurship and Innovation (by Peter Drucker) in 1953, the University of Illinois offered ―Small Business or Entrepreneurship Development‖ in 1953, Stanford University offered Small Business Management in 1954, and MIT offered an entrepreneurship course in 1958. In 1975 there were already more than a hundred colleges/universities offering entrepreneurship courses. Nowadays more than one thousand institutions in the United States offer entrepreneurship courses (Cone, 2007; Kuratko, 2005; Solomon, Duffy, & Tarabishy, 2002; Vesper 1998). Entrepreneurship education has also currently been offered by most universities in Indonesia including Bengkulu University. Entrepreneurship education at universities has several objectives. In general, the objectives among others include: enhancing students‘ understanding about entrepreneurial concepts and contributions of SMEs into the economy; developing the entrepreneurial mindset of students; motivating students to be entrepreneurs; providing students with entrepreneurial concepts and skills relevant to formation and development of new businesses; and providing circumstances conducive for students to start new businesses. Entrepreneurship has been found to be a popular subject and recent data from the US Small Business Administration shows that two thirds of college students intend to become entrepreneurs at some point in their careers (Shinnar, Pruett, Toney, 2009). Despite the emergence of entrepreneurship education at universities, there has been no consensus among universities or experts about what the contents of entrepreneurship subjects should be to be taught as different universities offer different contents of entrepreneurship subjects. Also, different experts also suggest different contents of entrepreneurship subjects (Kuratko 2005; Schramm, 2006; Solomon et al, 2002). It appears that the entrepreneurship is a multidisciplinary subject in nature and should be able to accommodate many relevant aspects. However, as suggested by Ronstadt (1987) ―in time, the question that are asked if entrepreneurship can be taught or should be taught will be replaced increasingly by what should be taught and how it should be taught‖. Solomon (2007) found some common elements in entrepreneurship courses, including: venture plan writing, case studies, readings and lectures by guest speakers and faculty. The typical elements of small business management courses include class work, tests and a major project such as the development of business plans; student business start-ups, consultation with practicing entrepreneurs; computer simulations; and behavioral simulations. Other popular activities include interviews with entrepreneurs, environmental scans, ―live‖ cases, field trips and the use of video and films (Solomon, 2007). RESEARCH METHOD This study is an exploratory research on the development of entrepreneurship education in the Bengkulu University including students‘ satifaction of the subject materials, teahing methods and expected outcomes of the entrepreneurship subject. This research used primary data collected from the students in the entrepreneurship subject and students who had undertaken the subject at Bengkulu University using a combination of two data collection technniques 198 namely interviews and a questionnaire. The collected data include: lecturers‘ opinion on the development of entrepreneurship education; students‘ ‗expectations‘ and ‗assessment‘ on the implementation of the entrepreneurship subject in terms of subject materials/contents, teaching methods, and outcomes expected from undertaking this subject. The collected data were analyzed using descriptive analysis and SatMat model developed by Abduh et al (2007). The descriptive analysis was used to explain the development of entrepreneurship education by using some indicators including the percentage of students interested in starting a new business. The SatMat model was used to identify and classify the level of sudents‘ satisfaction on the implementation of the entrepreneurship course in terms of subject materials, teaching methods, and expected outcomes from undertaking the subject. Students were asked to express their opinions on the ‘importance‘ of individual components of the subject materials, the teaching methods and the expected outcomes by using a Likert scale ranging from 1 representing ―very unimportant‖ to 5 representing very important. The students were then asked to express their opinions on the performance of the implementation of the entrepreneurship subject on individual components of the subject materials, the teaching methods and the expected outcomes by using a Likert scale rangging from 1 representing ―very poor‖ to 5 representing ―very good‖. Students‘ satisfaction on the implementation of the entrepreneurship subject were estimated by comparing the students perceptions on ―the importance‖ and ―the performance‖ of individual components of subject materials, teching methods, and expected outcomes by using a T-test. To classify the students‘ satisfacion level, the results of the comparison were plotted onto the satisfaction matrix (SatMat) consisting of 4 cells as indicated in Figure 1 (Abduh et al, 2007). Cell 1 reflects a situation where students are assumed to be highly satisfied because the level of performance is greater than the importance (expectation) level. This means that the performance of the entrepreneurship education exceeds the level of expectations. Cell 2 represents a situation where students are assumed to be moderately satisfied because their perception on performance is within the acceptable domain of satisfaction. Cell 3 represents a peculiar situation where clients are assumed to have a lower level of dissatisfaction because their perception of the performance is low but their expectation level from the respected component is also low. Cell 4 refers to situations where students are assumed to be highly dissatisfied because the perceived performance is much lower than their expectation. 199 FIGURE 1: SATISFACTION MATRIX (SATMAT) SHOWING THE LEVEL OF STUDENTS’ SATISFACTION/ DISSATISFACTION WITH THE IMPLEMENTATION OF THE ENTREPRENEURSHIP EDUCATION. P e r f o r m a n c e L o w H i g h Cell 1 Higher level of satisfaction Performance is HIGH and Expectation is LOW Cell 2 Satisfaction Performance is HIGH and Expectation are HIGH Cell 3 Dissatisfaction Performance is LOW and Expectation is LOW Cell 4 Higher level of dissatisfaction Performance is LOW and Expectation is HIGH Low High Expectation Source: Adapted from Abduh et al (2007) RESEARCH RESULTS AND DISCUSSION Fifteen entrepreneurship lecturers participated in the study and 144 students from seven faculties in Bengkulu University. Those students had undertaken and passed the entrepreneurship subject. The reserach participants were interviewed and asked to complete a questionnaire designed to explore their opinions about the implementation of the entrepreneurship subject at their own faculty. Varian in Entrepreneurship Education The results obtained from interviews with the entrepreneurship lecturers showed that initially Bengkulu University offered the entreprenership course as an elective subject. Due to an increasing awareness on the importance of being self-employed, entrepreneurship was then introduced as a compulsary subject in 2006. As a compulsary subject, the entrepreneurship has currently been tought at all seven faculties and must be taken by every student of the Bengkulu University. This indicates that the entrepreneurship education in Bengkulu University has developed over time. Despite the significant progress of entrepreneurship education several weaknesses still remain. Among others, these include: (a) there were some variances between entrepreneurship classes in terms of subject materials and teaching methods; (b) the existing entrepreneurship education programs were conducted on a temporary basis (c) a continual mechanism for sustainable entrepreneurship education has not been available (d) no regular and comperehensive evaluation had been undertaken to assess the impact of entrepreneurship education on the development of student entrepreneurship, and (e) no record was available on the number of students that became entrepreneurs. 200 Students’ Interests in Entrepreneurship The majority of the entrepreneurship lecturers (77%) suggested that the number of students interested in to be entrepreneurs has increased over time. They estimated that about ―5-10%‖ of students in their classes were interested in to start their own businesses. Two of the lecturers believed that ―11-15%‖ of their entrepreneurship students intended to be entrepreneurs. Compared to a study conducted by the Job Placement Center of The Bengkulu University in 1993, the percentage of students interested in operating a business in 2008 was much higher than that in 1993 as this was onlyabout 1% . This significant improvement in the number of student entrepreneurs can be regarded as a strength of the existing and future development of entrepreneurship education in the University. Students’ Satisfaction on Subject Materials Students‘ satisfaction on the materials of the entrepreneurship subject was specified by using the technique of SatMax (Satisfaction Matrix) developed by Abduh et al (2007). Students were initially asked to express their perceptions on the ―importance‖ (expectations) of 11 sections commonly provided in the the entrepreneurship subject at Bengkulu University. The students were then also asked to express their perceptions on the performance of the practice of the 11 sections as they experienced them during undertaking the subject. The results of data analysis are presented in Table 1 and Figure 1 below. TABLE 1. STUDENTS’ PERCEPTIONS ON THE IMPORTANCE AND PERFORMANCE OF SUBJECT MATERIALS No. Subject Materials Mean of Perceived Importance (Expectation) Mean of Perceived Performance Mean Difference T-test a. Introduction of Entrepreneurship 4.28 3.69 -0.59 Sig b. Entrepreneurs‘ Characteristics 4.44 2.97 -1.47 Sig c. Business Environment Analaysis 4.48 3.48 -1.00 Sig d. Bus. Opportunities Identification 4.58 3.35 -1.23 Sig e. Business Plan 4.67 3.35 -1.32 Sig f. Business Management 4.42 3.26 -1.16 Sig g. Marketing 4.49 3.43 -1.06 Sig h. Financial Analysis 4.56 3.31 -1.25 Sig i. Financial Report 4.46 3.20 -1.26 Sig j. Business Evaluation 4.47 3.24 -1.23 Sig K Business Development Strategy 4.58 3.28 -1.30 Sig The mean value of the students‘ perceptions of the importance of each of the 11 components of the subject materials was so high (greater than 4 on a five-point scale) representing that students‘ expectations on those subject components. Business plan, business opportunities recognition, business development strategy and financial analysis were found to be the most importance sections as perceived by the students. The mean values of students‘ assessment on the performance of individual subject materials ranged from 2,97 (as the lowest) to 3,69 (as the highest). These suggest that the performance in delivering all subject materials was regarded as ‗moderate‘ as perceived by the participating students. The introduction of entrepreneurship was found to have a higher mean 201 value of performance while the knowledge about entrepreneurship characteristics had the lowest one. The level of students‘ satisfaction on each of the 11 subject materials was estimated by comparing the mean value of students‘ expectations and performance of the materials. The results, as presented in Table 1, show that the sign of the mean difference for each sub- subject is negative and statistically significant. This suggests that students‘ expectations exceeded the performance of delivering the sections. The results imply that the students were not satisfied with the delivering of all of the materials of the entrepreneurship subject. Since the value of all differences was negative for all of the sections, all of the sections were classified into Cell 4 suggesting that the students experienced a higher level of dissatisfaction with all of the subject materials. FIGURE 2 SATISFACTION MATRIX (SATMAT) OF SUBJECT MATERIALS P e r f o r m a n c e L o w H i g h Cell 1 Higher level of satisfaction None Cell 2 Satisfaction None Cell 3 Dissatisfaction None Cell 4 Higher level of dissatisfaction - Entrepreneurs‘ Characteristics - Business Plan - Business Development Strategy Financial Report Financial Analysis - Bus. Opportunities Identification Business Evaluation - Business Management - Marketing - Business Environment Analaysis Introduction of Entrepreneurship Low High Expectation Students’ Satisfaction on Teaching Methods Students‘ satisfaction on teaching methods of entrepreneurship subjects was assessed by applying the same research methods applied to the students‘ satisfaction on the subject materials. Student participants were asked to express their opinions on the importance (expectations) and performance of nine types of teaching methods commonly used in the Bengkulu University. The results of data analysis are presented in Table 2 and Figure 2. 202 TABLE 2. STUDENTS’ PERCEPTIONS ON THE IMPORTANCE AND PERFORMANCE OF TEACHING METHODS No. Teaching Methods Mean of Perceived Importance (Expectation) Mean of Perceived Performance Mean Difference T-test a Facilitator: i. Entrepreneurship Lecturer 3.88 3.38 -0.50 Sig. ii. Guess Lecturer 4.04 2.72 -1.32 Sig. b Class Discussion 4.01 3.32 -0.69 Sig. c Group Discussion 3.94 3.30 -0.64 Sig. d Study group 3.67 3.13 -0.54 Sig. e Self directed studying 4.05 3.42 -0.63 Sig. f Individual tasks: making a plan for an own business 4.27 3.51 -0.76 Sig. G Group tasks: making a plan for a business owned by group and prepaing for a field practice 4.15 3.37 -0.78 Sig. H Conducting field research 4.45 3.06 -1.39 Sig. I Bus. field practice (market days) 4.51 3.15 -1.36 Sig. The mean values of students‘ perceptions on the teaching method range from 3.67 to 4.51 on a five point scale suggesting that all types of teaching method were perceived as important by the students. The teaching method of ―business field practice‖ was found to be the most important method of entrepreneurship education, followed by ‗conducting field research‘ and ‗individual tasks in making ―a plan of your own business‖. The business field is an activity where the students create a market for two days termed as ―market days‖. However, ‗study group‘ had the lowest mean value suggesting that this method was not really preferable compared to others as perceived by students. Students‘ perceptions on the performance of the practice of the teaching methods varied among the method types. However, none of them had a value above 4 on a five point scale. Among others, ―Individual tasks (making a plan for your own business)‖, ―self directed studying‖ and ―facilitation by an entrepreneurship lecturer‖ were found to be the first three methods which were perceiced as having better performance by students. These methods were ―group tasks‖, ―class discussion‖ and ―study group‖, suggesting that ‗working together with others‘ was viewed as a good method of learning by students. However, facilitation by a guest lecturer was found to have the lowest score of performance. The results on the estimation of students‘ satisfaction levels with the achievement of the expected outcomes are presented in Figure 2. Facilitation by an entrepreneurship lecturer was found to have the lowest mean difference between expectations and performance as perceived by students. This suggest that students were moderately satisfied with that method of learning. It was then followed by class discussion, group discussion, study group, self- directed studying, individual tasks and group tasks. However, students were found to be highly dissatisfied with the rest of the three existing methods namely facilitation by guest lecturer, field observation and business field practice. The results indicate that the practice of the existing teaching methods for the entrepreneurship subject were moderately satisfactory. 203 However, since no method had been found in Cell 1 indicating ‗higher level of satisfaction, much more improvements were needed to provide better methods in the practice of entrepreneurship education. FIGURE 3. STUDENTS’ SATISFACTION LEVEL ON THE METHODS OF ENTREPRENEURSHIP EDUCATION P e r f o r m a n c e L o w H i g h Cell 1 Higher level of satisfaction (None) Cell 2 Satisfaction - Facilitation by entrepreneurship lecture - Class discussion; - Group discussion; - Study group; - Self directed studying; - Individual tasks; - Group Tasks. Cell 3 Dissatisfaction (None) Cell 4 Higher level of dissatisfaction - Faciltation by guess lecture; - Field observation; - Business field practice. Low High Importance (expectation) Students’ Satisfaction on Expected Outcomes There are several outcomes which were expected to be gained by students from undertaking an entrepreneurship subject. In general, these include: an understanding of entrepreneurship and its roles and contributions to economic development; an understanding of entrepreneurs‘ characteristics; ability to find out business opportunities; capable of preparing a business plan; ability in designing business strategies; ability in financial management and recognition of capital sources; ability to get capital; ability in preparing financial reports; and ability in evaluating performance of a business and providing relevant recommendations. The results of data analysis on the expected outcomes are presented in Table 5 and Figure 5. TABLE 4. STUDENTS’ PERCEPTIONS ON THE IMPORTANCE AND PERFORMANCE OF EXPECTED OUTCOMES No. Expected Outcomes Mean of Perceived Importance (Expectation) Mean of Perceived Performance Mean Differ ence T-test a. Better understanding of entrepreneurship and its oles and contributions into economy 4.20 3.57 -0.63 Sig. 204 b. Understanding of entrepreneurs‘ characteristics 4.15 3.49 -0.66 Sig. c. Ability in recognizing business opportunities 4.44 3.51 -0.93 Sig. d. Capability in preparing a business plan 4.38 3.51 -0.87 Sig. e. Ability in formulating marketing strategies 4.35 3.33 -1.02 Sig. f. Ability in recognizing capital sources 4.33 3.28 -1.05 Sig. g. Ability in obtaining initial and additional capital 4.22 3.15 -1.07 Sig. h. Ability in financial planning and reporting 4.35 3.33 -1.02 Sig. i. Ability in evaluating performance of a business and providing relevant recommendations 4.44 3.36 -1.08 Sig. All of the mean values of students‘ responses on the importance of individual expected outcomes are above 4 on a five-point scale suggesting that the students show their intentions to have a good capability or ability in all common skills needed by an entrepreneur. Among others, ability in recognizing business opportunities, ability in evaluating performance and providing relevant recommendations, and capability in preparing a business plan were found to be the first three outcomes which were mostly expected by students. The mean values of students‘ perceptions on the performance representing the achievement of individual expected outcomes, as seen in Table 3, range from 3.15 to 3.57 on a five-point scale. These suggest that the performance of the outcomes achievement was good. ―Better understanding of entrepreneurship and its roles and contributions into economic development‖, ―ability in recognizing business opportunities‖ and ―capability in preparing a business plan‖ were found to be the best three among the expected outcomes. ―Ability in obtaining initial and additional capital‖ was found to be the lowest rank of the performance. This suggests that the students might have experienced some difficulties in obtaining initial and additional capital for running their proposed businesses during the program of ―business field practice‖. The results of students‘ satisfaction level in Table 5 indicate that there were gaps between students‘ expectations and performance of the achievement of the expected outcomes. The value of each gap was negative meaning that the expectations were greater than performance, suggesting that students were not satisfied with the achievement of the expected outcomes. The gaps range from -0.63 to -1.08 for ―better understanding of entrepreneurship and its roles and contributions to economic development‖ and ―Ability in evaluating performance of a business and providing relevant recommendations‖ respectively. As seen in Figure 4, all types of those achievements were classified into Cell 4 of the SatMax indicating a high level of dissatisfaction. The results suggest that the achievement of all types of the expected outcomes need to be improved in the future and accordingly relevant strategies should be formulated and developed to enhance the existing achievements. FIGURE 4. STUDENTS’ SATISFACTION ON THE ACHIEVEMENT OF EXPECTED OUTCOMES 205 R e a l i z a t i o n ( p e r f o r m a n c e ) L o w H i g h Cell 1 Higher level of satisfaction (None) Cell 2 Satisfaction (None) Cell 3 Dissatisfaction (None) Cell 4 Higher level of dissatisfaction - All types of the expected outcomes gained by students from taking the course of the entrepreneurship subject Low High Importance (expectation) CONCLUSIONS As a response to an increasing rate of unemployment especially employment of educated people, a number of entrepreneurship programs have been conducted in Bengkulu University. Since 2006, entrepreneurship has been a compulsay subject and accordingly every student must complete this subject. This study is aimed at reviewing the practice of that compulsary subject. Based on the results of the study, there are several conclusions that can be drawn as follows: a. The entrepreneurship education in Bengkulu University is progressing over time. Among others, the progress was indicated by an increasing number of students who were interested in to be entrepreneurs. b. The majority of students perceived that all types of materials provided in the entrepreneurship subject were important. Business plan, business opportunities recognition, business development strategy and financial analysis were found to be the most importance sections as perceived by the students. However, students‘ perceptions on the performance of providing the subject materials was lower than expected and according to the results of SatMat, those students experienced a higher level of dissatisfaction. c. Students‘ perception on teaching metods indicated that business field practice, conducting field research, and preparing a business plan were three methods that they perceived as more important. The students were found to be moderately statisfied with the methods of facilitation by the entrepreneurhip lecturer, class discussion, group discussion, individual and group tasks. However, the students were not satisfied with the business field pactice, fasilitation by guest lecturers and field observation. d. Students perceived a higher expectations on all types of expected outcomes which could be gained fom doing an entrepreneurship subject such as ability in reconizing business opportunities, capability in preparing a business plan, ability in evaluating performance of a business and providing relevant recomendations. However, students‘ perceptions on the performance of the achievement of the expected outcomes were much lower than they expected. This resulted in the students being not satisfied with the existing achievements. 206 RECOMMENDATIONS This study has tried to shed some light on several areas of the practice of the entrepreneurship subject, such as students‘ perceptions on the importance of the existing subject materials, teaching methods, and expected outcomes from the entrepreneurship subject. However, several important aspects relating to the findings have not been examined yet. Accordingly, future research should be focussed on investigating factors affecting the variation of students‘ perceptions in terms of their preferences in subject materials, teaching methods, and level of satisfaction. Future studies should also be focused on formulating relevant strategies to enhance the effectiveness of entrepreneurship education in the future. 207 REFERENCES Abduh, M. (1997) (a) Manufacturing Industry in Indonesia. Tesis Master. 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Small Business, Job Creation and Growth: Facts, Obstacles and Best Practices, Paris. Rambe, R.A. (2003) Peranan Prestasi Akademik dan Kemampuan Non Akademik terhadap Keberhasilan Lulusan Unib dalam Memperoleh Pekerjaan di Kota Bengkulu, Laporan Penelitian Dosen Muda, Lembaga Penelitian, Universitas Bengkulu, Bengkulu. Rice, M. P. and Matthews, J. B. (1996). Growing New Ventures, Creating New Jobs: Principles & Practices of Successful Business Incubation. Westport: Quorum Books. Robert D. Hisrich (2009). International Entrepreneurship: Starting, Developing, and Managing a Global Venture. Thousand Oaks, California: Sage Publications, Inc. Ronstadt, Robert (1987). The Educated Entrepreneurs: A New Era of Entrepreneurial Education is Beginning, American Journal of Small Business, Spring 1987, 37-53. Sapri, J. dkk. (2003) Pengembangan Model Kurikulum Pendidikan Kewirausahaan Berbasis Kompetensi dan Implementasinya padaUniversitas Bengkulu. FKIP. Unib Schramm, Carl J. (2006). The Entrepreneurial Imperative: How America‘s Economic Miracle Will Reshape the World (and Change Your Life), New York: Harper Collins Sheperd, D. A. and Shanley, M. (1998). New Venture Strategy: Timing, Environmental Uncertainty, and Performance. Thousand Oaks: Sage Publication Shinnar, R., Pruett, M., & Toney, B. (2009). Entrepreneurship Education: Attitudes across Campus, Journal of Education for Business, Vol 84, Iss 3, 151 -158 Solomon, George. (2007). An Examination of Entrepreneurship Education in the United States, Journal of Small Business and Enterprise Development, Vol 14, No 2, 168- 182. Solomon, GT., Duffy, S., & Tarabishy, A. (2002). The State of Entrepreneurship Education in the United States: a Nationwide Survey and Analysis, International Journal of Entrepreneurship Education, Vol 1, No. 1, p 65-86 Universitas Bengkulu (2006) Rencana Strategis 2006-2016 dan Rencana Operasional 2006- 2010 Universitas Bengkulu Universitas Bengkulu, Bengkulu. Urbano, D., Aponte, M., & Toledano. (2008). Doctoral Education in Entrepreneurship: a European Case Study. Journal of Small Business and Enterprise Development, 15(2), 336-347 Vesper, K.H. (1998). Unfinished Business (Entrepreneurship) of the 20 th Century, USASBE National Conference, January 1998 Wijaya, H.C. (2008). Entrepreneurship in Bogor Agricultural University, paper presented at APEC Workshop on Embedding Entrepreneurship in University Curriculum, Hanoi, Viet Nam, July 23, 2008. 209 PREVENTING THE GROWTH OF CHILD TRAFFICKING: RAISING PUBLIC AWARENESS OF THE IMPORTANCE OF EDUCATION FOR STREET CHILDREN IN INDONESIA Tsuroyya Tsuroyy, Brian Pranata, and Wahdi S. A. Yudhi Bureau of Planning and International Cooperation, Ministry of National Education, Republic of Indonesia, E-mail Addresses :
[email protected] [email protected] [email protected] ABSTRACT Leisure can be employed as a strategic intervention to address social issues. Serving as a function of leisure, entertainment has been an interesting medium to attract audiences. In those entertainment products, some educational and social messages are implicitly inserted. Even though there are many kinds of entertainment products, public theater tends to stand out to the extent that it embeds local cultures, values, and religious rituals. This is prevalent in the growth of traditional public theater in Indonesia which has more appeal to the local community. Its appeal contains informal education in which people learn about social issues that take place in their community. Working on narratives, this paper seeks to employ traditional public theater as a medium to raise public awareness of the importance of education for street children. What forms the backgrounds this alternative is that the growth in the number of street children in Indonesia has led to several complicated social issues such as child trafficking, HIV/AIDS prevention, drug use, lower people economy, and child’s environment sustainability. One way to slow down the growth of these problems is by raising the public’s consciousness to prioritize child safety, education, and healthcare. The authors believe that child’s public theater could be a good alternative because public theater has the richness of local cultures and the capability of attracting audiences. 210 INTRODUCTION Global child trafficking in the form of street children shares the same urgency as other social problems that occur in Indonesia. As reported by the Ministry of Social Affairs (Jaya, 2008), the number of street children reached 46, 800, spread across 21 provinces in the country in 2005. This issue has become extremely critical and the government seeks to resolve it. For instance, the Ministry of Social Affairs reported that in 2006 the number of street children increased to144, 889, half of them active drug users. Further, HIV infected around 8,581 of the total number (Ministry of Public Health, 2007). This reality suggests that the government has not fully protected abandoned children, especially street children. In fact, the 1945 National Constitution states that the government is responsible for protecting abandoned children and poor people. As the abandoned group, street children specifically have some characteristics that are embedded in their identity. According to the Social Affairs Office in Sumatra (PMKS), street children are defined as children of five to 18 years of age who spend most of their time on the street or in public spaces to earn some money. One characteristic is they are working various irregular jobs such as street vendors, singers on public transportation, car cleaners, and so forth. In addition to irregular jobs, street children often work illegally and encounter dangers on the street. Their illegal jobs are prostitution, selling drugs, picking pockets, and shoplifting. The children do not even care that they risk their lives and freedom because they are the breadwinners for their families. Furthermore, the nature of the streets, which enforces rough ways of living, endangers street children‘s safety. They are often the victims of traffic accidents. It is not just traffic that causes deaths and injuries of street children; street crimes also endanger their safety. For instance, it has been observed that many street children have to pay some money to a group of people who claim that they protect street children. In fact, the street children actually work without this so-called protection in order to survive. Because of working in the streets, these children do not have time to go to school and enjoy their childhood. Going to school becomes the least priority and causes a wide range in their educational backgrounds. Most street children cannot meet K-12 (12 years of primary education). Some of them go to school until the third or the fourth grades, and others have dropped out from junior high school. In addition to the lack of educational access, these kids hardly have time to enjoy playing with their friends in the same way most children have. Working in the street encourages them to be mature too early. They become too serious and sarcastic in communicating with their community. Assessing the background of the condition of street children in Indonesia previously, the authors argue that there is a necessity to raise awareness of the importance of education and child trafficking. Both issues need several in-depth research projects to seek the best strategic communication intervention that can be implemented. To fulfill the demand of extensive research, the authors would like to examine if the public theater that implements education- entertainment framework as a form of leisure could be an effective medium to address both issues. However, it is important to note that this paper would serve as semi-formative research in the way that it will assess the strengths and weaknesses of the public theater and offer the best alternative to address the issues. LEISURE AND ENTERTAINMENT 211 Leisure has been widely defined and its functions change over time. In general, leisure serves as relaxation, self-actualization, fun or pleasure, non-serious activities, spiritual tradition, and games. The use of leisure varies depending on the type that someone has. It ranges from family relationships, sports, and friendships, to entertainment (notes on class of Entertainment, Leisure, and Strategic Social Change, 2009). Leisure becomes an official field which gets more attention as it adapts to the needs of communities in the 21 st Century. In terms of community‘s needs, Ngai (2005) suggests leisure satisfaction and quality of life serve as pivotal aspects. In his study of leisure in Macao, he notes that Macao was built to be a tourism destination for international tourists, yet it fails to fulfill the needs of the Macao community. This issue creates a gap between leisure opportunities and leisure places. This gap means most people in Macao seek opportunities in the neighborhood city. Ngai (2005) recommends that the Macao government build some entertainment places in the form of leisure activities for the community. These places would be built based on local values which aim at providing equal opportunities and attracting tourists both from domestic and international population regardless of their gender, age, group, or race (Ngai, 2005). Shogan (2002), however, tends not to oversimplify the holistic concept of leisure by arguing there are a lot of important aspects needed for activities to be called leisure. She views unequal opportunities of conducting leisure activities as leisure constraints. One of the causes of these constraints is the lack of skill acquisition. Using Foucault‘s theory, Shogan (2002) argues that in order to acquire essential skills for leisure activities, people have to embrace leisure constraints. The ways the community characterizes these constraints and looks for the best alternatives to create a positive participation from the community. Therefore, policymakers and practitioners are responsible for eliminating constraints, but also making possible constraints which result in community involvement (Shogan, 2002). Discussing community involvement, entertainment as part of leisure activities can attract large crowds. Entertainment does not only offer fun and pleasure, it also generates profits for entertainment practitioners and the local community. In the entertainment field, the United States entertainment industry has earned approximately $8 billion annually. This is due to the United States‘ role as a model and center of entertainment industries in the world. The popularity of the TV series The Bold and the Beautiful reached 500 million viewers in 98 countries (Lancaster, 1998). In addition to the film industry, the United States also exports reality shows such as Who Wants to Be a Millionaire and has become the trend setter of the media industries. The growth of the entertainment industries cannot be separated from the growth of technology in the 21 st Century. Therefore, the way these industries shift so quickly has made them a global business which attracts great masses from different countries throughout the world. For instance, the Indian movie industry, as the largest movie industry in the world, produces 800 films each year and they have been viewed by 3.5 million people every day (Merchant, 1998). Indian movies attract viewers from South Asia, Southeast Asia, Australia, Europe and North America. Speaking about the global entertainment industries, Blakley (2001) suggests that ―the current situation for global entertainment is as conceptually complex as it is economically vibrant. In a world of converging media, the potential value of tapping into transnational subsets of the global market—that is, audiences that reside in different regions and countries but share a common identity, language, affinity—is greater than ever before.‖ In short, Blakley (2001) views the current global entertainment as growing significantly as more and more people share common values, languages and cultures. Thousands of miles of distance do not limit 212 any interactions that occur in the global community as the Internet facilitates international communication regardless of country borders and time differences. In addition, the Internet allows a revolutionary way of distributing entertainment products faster than ever before. The growth of entertainment industries has attracted communication practitioners and social workers to use them as strategic tools for social change. The idea of combining entertainment with education has been a strong focal point in the communication and leisure studies. According to Singhal, Cody, Rogers, and Sabido (2004), there are several aspects needed for an entertainment product to be called an E-E product. One of them is that it has to be a research-based product that includes an active participatory method. In addition, it should aim at entertaining people as well as raising their awareness of certain social issues. Furthermore, the long-term objectives of an education-entertainment (E-E) product will be to promote behavior changes and to create favorable attitudes. Several studies in the E-E field have shown that this intervention has been successful in several countries in the world. What makes E-E intervention successful compared to others is that it has various types of entertainment products which enable it to reach the target audience more easily (Singhal and Rogers, 2002). For example, Soul City, a South African TV soap opera was successful in addressing domestic violence. Other examples are Sixto Sentido, a popular Nicaraguan soap opera that promotes youth and women‘s rights; and Is this Justice?, popular multi-media campaigns in India that focus on preventing the stigma and discrimination against women with HIV/ AIDS (Singhal and Lacayo, 2007). In addition to various types of E-E, Singhal and Rogers (2002) propose other agendas in the field of education-entertainment. They are ―attention to resistances to E-E; attention to the rhetorical play and affective aspects of E-E; rethinking the old conceptualization of behavior change; and employing methodological pluralism and measurement ingenuity.‖ Grounding in an active participatory method, an E-E product should have abilities to endure any kind of resistance as well as to persuade audiences to change their behaviors. To achieve its long- term objectives, an E-E product will then need various nimble approaches and techniques which represent local cultures, and contain creativity, innovation and originality. The ability of an E-E product to persuade audiences varies depending on its degree and flexibility to engage with the target audiences. Tufte (2005) classifies E-E products into three categories: first, second, and third generation. He suggests that what makes the third generation different from the previous ones is that it empowers people to generate a structural change. In other words, it encourages people to improve their ability for problem solving both individually and collectively. Currently, there are many E-E products that are classified as third generation which address different social issues. NARRATIVES, PUBLIC THEATER, AND LOCAL VALUES From the narrative theorists‘ perspectives, the world is all about storytelling in a way that its existence is essential for people to communicate and understand the world. They argue that media industries, including entertainment, also work at telling stories. However, it is also interesting to note that this theory seeks common elements across stories (Williams, 2003). As a part of the narratives, public theater is also meant to tell stories with various themes by showing interesting and unique characters. Harris (2005) indirectly discusses the relationship between narratives and themes for public theater. He notes that ―…individual signs gain in meanings by being organized in sequences, running over time‖. Some sequences become narratives. We are well used to constructing and reading particular sequences in order to 213 deliver a meaning, and thus pleasure as the meaning unfolds. A classic example of the general structure of narrative is one that is widely found in a number of folk tales and myths.‖In Indonesia for example, folk tales and myths, such as Bawang Merah Bawang Putih and Kancil, tend to be the themes for public theater because these two narrative products share common values that exist in the Indonesian community. In order to provide a brief background of folk tales and myths in Indonesia, we will narrate stories of Bawang Merah Bawang Putih and Kancil and discuss how the two stories play an important role in the community. Bawang Merah translates as red onions, but the more faithful translation is shallots. In contrast, Bawang Putih‘s faithful translation is garlic. This story tells about different characters Shallots and Garlic. Shallot is famous for her evil character and always does something bad to Garlic. Playing the opposite character, Garlic is always nice, kind, friendly and likes to help people. She does not like to fight even though her foster sister, Shallot, is always mean to her. As the story goes, Garlic serves as a heroine who later lives happily ever after. Unlike the Western version of Garlic and Shallot (Cinderella), this story does not include a fairy godmother who grants Garlic‘s wishes. Different from Garlic and Shallot, Kancil is a story about an animal which is very smart and usually wins any battles with other animals. Kancil looks like a male deer, but he does not have antlers. He likes cucumbers so much that he sometimes has to steal them from farmers. Once, Kancil was in a battle with a group of crocodiles which wanted to eat him. With a stroke of genius, Kancil promised to be their supper if they gathered at the river to help him go to another island. So, the crocodiles formed a line across the river and Kancil jumped over them to cross the river. When he got to the other island, he said farewell and left the crocodiles angry. From these two folk tales, it is important to note that some educational messages can be learned. They teach people to do good things and be smart so that they cannot be easily defeated. In addition, it is interesting to see the power of narratives in helping people to understand and make sense of the world. In making sense of the world, theater, as a part of narratives, is seen as a source of entertainment and social criticism which promotes certain educational messages and propaganda in contemporary Western society (Hatley, 1971). Most of the time, theater‘s function has been replaced by media industries which can reach massive target audiences and deliver the messages in more engaging ways. In contrast, Hatley (1971) argues that public theater apparently is not being replaced by media industries as in Indonesia; public theater not only functions as entertainment or social criticism, but it also reinforces religious traditions. Its role is still pivotal to the community for people still consider public theater as a teacher. The most popular public theater in Indonesia, especially in Java is the puppet shadow play. This shadow play is usually performed when someone celebrates good news such as a birth, a wedding, and so forth. However, sometimes this shadow play serves as a religious ritual when it is performed to throw away bad luck for someone. Up to now it has been believed that if someone got a long-term illness, something evil surrounded him or her. In order to diminish the evil spirit, this person would hold a puppet shadow play (wayang). The ritual of this type of the puppet shadow play is called ruwatan. In the performance, the dalang, the one who operates the puppets and narrates the story, usually has various themes such as Mahabarata and Ramayana which come from the Indian epics. Just as the folk tales of Shallot and Garlic, these Indian epics also contain ―a sociopolitical message and a set of moral qualities, embodied in the characteristics of particular wayang figures, as standards of social behavior‖ (Hatley, 1971). Even though a wayang performance is able to engage the community to get the sense of being commoners or merakyat, there is still a gap in the social 214 structure of the community as the front seats are always reserved for leaders in the community (Hatley, 1971). The current wayang performance is also broadcast on several television channels and radio stations. Through these channels, urban people can also enjoy the richness of the cultures that is offered by the wayang performance. The other form of public theater popular in the Javanese community is ludruk, a type of cultural drama comedy which incorporates both traditional and modern cultures. At the beginning of the performance, one performer will sing in the Javanese language to address the audiences and introduces the theme of the performance. In certain ludruk, an educational message is introduced at the beginning, such as the importance of respecting others‘ differences and living with high tolerance. Then, the story continues as what it has been narrated previously. The modern touch in this traditional drama comedy is that all of the performers are dressed in semi-formal clothes. Unlike the wayang performance, the dalang and the traditional singers are dressed in traditional Javanese wardrobes. Another modern touch in ludruk is that it mixes the Javanese dialect with the national language, Bahasa Indonesia. However, ludruk was once seen as a communist public theater as its target audiences and performers are from lower class people. Like wayang performances, ludruk nowadays is also broadcast on television and radio (Hatley, 1971). To wrap up, both Javanese public theaters have their own strengths and weaknesses. Both are able to engage the audience, yet it seems there is a hierarchical structure in wayang performances. In contrast, ludruk seems much more attractive to people as it upholds high tolerance among individuals, yet it was once accused of being a communist public theater. The popularity of ludruk and ketoprak, a more elaborate form of ludruk, in Central and East Java influenced other parts of Indonesia and the east coast of Sumatra in the 1920s and early 1930s. One of the results of the popularity of traditional public theater in Java was lenong, an indigenous drama comedy in the Betawi ethnic group. Lenong was originally formed in public theaters, called tonil and bangsawan. Lenong was and is still popular across Jakarta, especially for the indigenous people there, the Betawi ethnic group. Like ludruk, there is no strict formula for performing lenong. Its theme varies from historical tales of Betawi folklore, adaptation of films, print narratives, to comic stories. Just as other public theaters in Indonesia, lenong is also performed with an orchestra, called Gambang Kromong. This orchestra was originally a mixture of Javanese and Sundanese gamelan, a flute, and some stringed Chinese instruments. As lenong is a traditional heritage of the Betawi ethnic group, it uses the Betawi language as a medium to preserve Betawi cultures (Foulcher, 2004). During the 1990s, lenong turned out to be very popular as it brought a fresh entertainment for audiences. One of the first private TV channel broadcast a special program for lenong, called Lenong Rumpi. The performers were from different provinces across Indonesia. They were Batak, Chinese, Betawi, and Minang people; this program actually represented Jakarta, the capital city of Indonesia, where different ethnic groups mingle together. The stories usually covered problems that were faced by a Betawi household. However, this program tended to be a situation comedy (sitcom) which sometimes also dealt with social issues. Each time one of the performers made jokes, the orchestra would perform to exaggerate the jokes. This program was so successful that the same TV channel produced the motion picture of this program. The movie achieved the same success as the TV series did. In order to fulfill the demand of the audiences at that time, the same TV channel launched another version of lenong, called Lenong Bocah. The difference between Lenong Rumpi and Lenong Bocah was the target audience; that is the latter was designed for child audiences. Lenong Bocah 215 performers were cast from several communities of public theater, and most were little more than teenagers (personal notes, 2009). To summarize, the growth of public theater in Indonesia offers a different type of leisure for the society as it provides local culture, values, and religious rituals. Even though its growth achieves a lot of support from media industries, its existence remains irreplaceable. It is its various roles of public theater that cause it to last longer than public theater in the Western contemporary society. The ability of public theater to engage and persuade the community has been tremendously effective for certain types of public theater serving as educational institutions for the audiences. Moreover, to flourish, the existence of traditional public theater has become a means to preserve local cultures, so that its tradition will perpetuate over time and generations. PROPOSAL Grounding in the previous discussion about leisure, entertainment, and public theater in Indonesia, this paper proposes to create a public theater which addresses the importance of education for street children in Indonesia. The following are sequences of objectives, expected outcomes, description, and production program. OBJECTIVES The objectives of public theater for street children are to: 1. Promote the importance of education for street children, leading to reduction of the number of child trafficking cases and a decrease in the numbers of street children in urban areas; 2. Share positive messages related to starting and implementing entrepreneurship, leading to increased small businesses in the community; 3. Create entertaining and complex narratives capable of addressing social issues involved in creating a sustainable environment for street children; 4. Create favorable behavior among parents and adults in prioritizing a child‘s education, security, and health; and 5. Remain flexible to any possible educational messages during the implementation. EXPECTED OUTCOMES The outcomes of this project can be measured by several variables involving a number of issues that have been addressed. The first is that whether or not the number of street children decreases. During performances in several targeted areas, the production team will work with a Monitoring and Evaluation Team to assess, evaluate, and create some changes depending on the research, based on the target audience‘s responses. The second variable is the number of child trafficking cases, especially of street children. Consequently, a decrease in the number of street children will lead to a reduced number of child trafficking cases. The last variable that can be measured is the growth of small businesses owned by lower income people. If this growth does not show a significant increase, alternative strategies should be proposed in order to meet the objective of this project. DESCRIPTION Child‘s public theater is a public entertainment that deals with the lives of street children. The main objective is to raise the awareness of the life of street children which covers 216 complicated social issues such as child trafficking, education, healthcare, economy, and family relationships. The format of child‘s public theater will be influenced by the areas of the target audiences for this project. It also seeks to involve local cultures, values, and communities. For example, lenong, a traditional public theater from the Betawi ethnic group, will be employed as the format of child‘s public theater that will be performing in Jakarta. The performance will be held once and the response will be evaluated. If it is seen as favorable, performances will then be held twice a month in an urban area. There will be two different stories in addressing child‘s issues. The theater will be performed in public places and will be open to all. Each performance will last approximately 1 – 1.5 hours and be hosted by local stakeholders such as the local government, NGOs, community leaders, and other members of the community. After each performance, there will be a short session to get the audience‘s responses in the form of questionnaires and interviews. The data then will be used as the basis of the story‘s development. PRODUCTION PROGRAM Borrowing the models of project-based leisure by Stebbins (2005), child‘s public theater will be formatted as a one-shot project and occasional projects. A one-shot project refers to a spontaneous project that does not depend on a specific time. Its purpose is to maximize the use of free time to do something fun (Stebbins, 2005). As the pilot project, child‘s public theater will be performed when street children and community gather casually. Then, if it gets the expected response, the format will shift to occasional leisure which will be performed twice a month. Emphasizing an active participatory method, ideas for the play will involve street children and the local community in the process of production which includes child actors and a creative team. The theme will vary from fairy tales and historical stories, to local folklore. The local community and the researcher will serve as facilitators and committees in the production process. The development of the stories is flexible, open to any suggestions from the local government, NGOs, and donors depending on the results of formative research and ongoing evaluation. CONCLUSION Leisure can be employed as a strategic intervention to address social issues. Serving as a function of leisure, entertainment has been an interesting medium to attract audiences. In those entertainment products, some educational and social messages are implicitly inserted. Even though there are many kinds of entertainment products, public theater tends to stand out to the extent that it embeds local cultures, values, and religious rituals. This is prevalent in the growth of traditional public theater in Indonesia which has more appeal to the local community. Its appeal contains informal education in which people learn about social issues that take place in their community. Working on narratives, this paper seeks to employ traditional public theater as a medium to raise public awareness of the importance of education for street children. What forms the backgrounds this alternative is that the growth in the number of street children in Indonesia has led to several complicated social issues such as child trafficking, HIV/AIDS prevention, drug use, lower people economy, and child‘s environment sustainability. One way to slow down the growth of these problems is by raising the public‘s consciousness to prioritize child safety, education, and healthcare. 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Anak jalanan rawan terkena HIV/AIDS. Retrieved from http://www.depkes.go.id/index.php?option=news&task=viewarticle&sid=2727&Itemi d=2 on 18 November 2008. National University of Singapore (NUS). (2004). Community and the metropolis: Lenong, Nyai Dasima, and the New Order. Singapore: Foulcher, K. Ngai, V. T. (2005). Leisure satisfaction and quality of life in Macao, China. Leisure Studies, 24, 195-207. Shogan, D. (2002). Characterizing constraints of leisure: A Foucaultian analysis of leisure constraints. Leisure Studies, 21, 27-38. Singhal, A., Cody, M., Rogers, E., & Sabido, M. (2004). Entertainment-education and social change: History, research, and practice. Mahwah, NJ: Lawrence Erlbaum Associates. Singhal, A., & Rogers, E.M. (2002). A theoretical agenda for entertainment-education. Communication Theory, 14(2), 117-135. Stebbins, R. A. (2005). Project-based leisure: Theoretical neglect of a common use free time. Leisure Studies, 24, 1-11. The Norman Lear Center. (2001). Entertainment goes global: Mass culture in a transforming world. Annenberg: Blakley, J. Tufte. T. (2005). Entertainment-education in development communication between marketing behaviors and empowering people. In T. Tufte & O. Hemer (Eds.), Media and glocal change: Rethinking communication for development. Goteborg: Nordicom. Williams, K. (2003). Understanding media theory. London: Hodder Education, Part of Hachette Livre UK. 218 A GLANCE OF KATHOEY LABORS: IN THE MIDST OF THAI’S TRADITIONS AND LEGAL AUTHORITIES Ms Tsuroyya Tsuroyya, Mr Brian Pranata, and Wahdi S. A. Yudhi Bureau of Planning and International Cooperation, Ministry of National Education, Indonesia Telephone : +62 (21) 5711144 ext 2603 E-mail Addresses:
[email protected] [email protected] [email protected] ABSTRACT Gays, lesbians, and transgender have always been major issues in Southeast Asian countries where various ethnicities, religions, cultures and traditions are determinant for many aspects of life for its people. To some extent, people generally cannot accept ideas of gays, lesbians, or even transgender people who wish to deny what has been given by birth by transforming their bodies into female bodies. Considering there is a gap between a belief that transgender is part of the Thai tradition and religion and a prejudice that kathoey have been discriminated against in the workforce, this paper seeks to investigate how these aspects are interconnected based on Thai students’ perspectives who continue their studies in the United States. They are Thai students’ perspectives about transgender labor roles, discrimination and improvement in the future. These points were investigated by conducting interview sessions with the respondents, sending the designed questions via e-mail, gathering information from related references, and transcribing the results of the interviews. Based on collaborative information from both references and respondents, the authors conclude that transgender labor roles are invincible in which their mobility is restricted by public companies and government institutions. Concerning transgender labor discrimination, there was only a small number of incidents that the respondents practically noticed. Yet, the authors argue that this is somewhat irrelevant logic for the government to not support them by implementing labor regulations consistently. Lastly, both Thai society and Thai government are two important factors that can help improve kathoey’s lives. In fact, Thai society’s role is significant for this community improvement—especially better respect of kathoey’s differences in a plural community—as people in general have got along well with this group. INTRODUCTION Gays, lesbians, and transgenders have always been major issues in Southeast Asian countries where various ethnicities, religions, cultures and traditions are determinant to many aspects of life for its people. To some extents, people generally cannot accept ideas of gays, lesbians, or even transgender people who wish to deny what has been given by birth by transforming their bodies into female bodies. In southeast Asia, Thailand provides advanced facilities for enhancing those who choose to be transgender people. Even though there are some 219 transgender communities in the Philippines bakla, and Indonesia waria, Thailand remains the most famous country in southeast Asia for its transgender people since these people successfully undergo sexual organ surgery. In fact, Thai kathoey, ―a second type of female‖ who used to be a male is often more beautiful than a real woman. It really seems that people in Thailand generally get along with kathoey well. To get up-close to kathoey‘s home country, Thailand is a special country because it has never been colonized. Another special factor is that Thailand was successful in making a quick recovery of its economic sector after suffering from the financial crisis in July 1997. Currently, its economy is that of a lower middle income country, the same as Indonesia and the Philippines (Kim, 2008). In terms of geographical conditions, Thailand is different from the two neighboring countries. The Thai embassy in the United States notes that its country‘s shape is similar to a head of elephant. As it is shown in Figure 1. Thailand shares a border with Cambodia to the east, Lao to the northeast, Myanmar to the west and Malaysia to the south (retrieved June 6, 2008, from http://www.thaiembdc.org/index.htm). According to the Asian Development Bank (ADB), with a size of 198,114 square miles, Thailand was inhabited by 65.23 million people as at July 1, 2006. As ADB recorded in 2006, the number of the Thai labor force was 36.429 million people, consisting of 35.686 million employment and 552,000 unemployment labor force. Male employees were still dominant as its percentage was bigger than female employees: 80.9 % : 64 %. FIGURE 1 . MAP OF THAILAND source: http://www.divetheworldthailand.com/map-of-thailand.htm Regarding the Thai labor force, it is interesting that transgender people seem excluded from much of the Thai workforce. In fact, some of them work in either entertainment industries or cosmetics-related industries. Whether there is a record or not, transgender labor have given a certain contribution to the Thai‘s economy. Many assumptions have been made concerning why transgender roles in the economic sector are invincible. Some say that kathoey are not appropriate representatives for official institutions. Others state that they are actually included as either female or male employees since the government looks at their physical gender. Lastly, kathoey appears to be normal in Thai society so that the government often does not pay so much attention to them. RESEARCH BACKGROUND 220 Tracing back to the history of kathoey, originally its meaning is hermaphrodites, but people have used it to label Thai male transgenders at present (Jackson 1998). However, this term is perceived as a reference to depict a female gender. In Thailand, there are different kinds of kathoey including long-haired kathoey who dress as women. The Western society may describe this term as ―ladymen‖ or ―ladyboys.‖ There are several studies that show the relationship between kathoey and Thai tradition as well as parts of religion, especially Buddhism. One of them is by Jackson (1998), who notes that ―a code of conduct for monks, Vinaya,‖ classifies four different kinds of sexes: ―males, females, ubhatobyanjanaka (hermaphrodites) and pandaka (males displaying a variety of other non-normative anatomies or sexual preference).‖ In Jackson‘s Performative Genders, Preverse Desires: A Bio-History of Thailand’s Same-Sex and Transgender Cultures, he argues that Thai Buddhism does not consider a same-sex sexual activity as sinful (2003). Therefore, this argument presumes an idea that gays, lesbians, and transgenders are part of traditions in which the religion, Buddhism, enables these communities to perpetuate in the Thai‘s mainstream society— straight people with normal lives. Even though the basis of kathoey‘s growth is a tradition and recognized in its religion, it does not mean that legal authorities officially accept transgenders‘ presence. There is an on-going issue of transgender people treatment in the workforce. Due to the stigma that kathoey must bear, it is difficult for them, even university graduates to make money from either government institutions or public companies. Most of them are hired by private companies in the entertainment industries to perform cabaret shows for instance. Furthermore, affected by their sexual desire to present themselves as females, some of them work in sectors that relate to beauty and female clothing by being designers, make-up artists, and hairdressers. Besides, one can find kathoey who work as waitresses, sales women, and store clerks in family-owned small businesses (Taywaditep et al., 1997; Peracca et al., 1998). Considering there is a gap between a belief that transgender is part of the Thai tradition and religion and a prejudice that kathoey have been discriminated against in the workforce, this paper seeks to investigate how these aspects are interconnected based on Thai students‘ perspectives who continue their studies in the United States. There are three main concerns that will be discussed in this paper regarding Thai transgender labor discrimination. The first is Thai students‘ perspectives about kathoey, especially their roles in the workforce. In addition to transgenders‘ labor roles, it discussed from the students‘ points-of-view concerning an issue of transgender labor discrimination. The last concern, which is the most important, is their expectations for the government to improve kathoey‘s lives to have better employment. RESEARCH METHODS In order to investigate three main points of transgender labor discrimination in Thailand, the authors gathered information from articles, books and interviewees. The authors adopted an interview method and picked five Thai students who are continuing their studies in the United States. According to Maricopa Community College, an interview-based survey requires the authors to draw an inference from interviewees because he or she does not participate directly with the community that is discussed in his/ her topic. In this paper, due to difficulties of observing kathoey‘s lives directly, the authors designed questions in the form of an interview, which included a non-experimental descriptive approach. However, this method‘s weakness is that the interviews‘ results will be self-reliant in which the authors may experience personal problems or attitudes , such as ―misunderstanding, poor memory, and intentional deception‖. 221 In conducting the interviews, the authors designed five questions that cover Thai students‘ general knowledge about kathoey, the issue of kathoey‘s labor discrimination, and suggestions of law improvement concerning kathoey‘s labor. There were five Thai respondents who were studying in the United States. Two of them answered the questions through e-mails due to their tight schedules. The others were interviewed by the authors equipped with a digital recorder .The authors experienced different ways to approach the interviewees and to explore broader knowledge about Thailand transgender discrimination. In doing so, the authors did not strictly follow the research questions that had been prepared prior to the interview sessions. The authors then transcribed the interview sessions. The authors realized that there were several weaknesses in processing the interviews. One of them was difficulties in finding an appropriate style of transcribing informal words such as ―like you know.‖ Besides, there was not any proofreader to match the recording and the transcribed versions. The authors took effort to transcribe all materials that had been recorded even though intentionally leaving out some informal expressions, which did not have direct relationship with the questions. RESULTS Based on the interviews and answers from the respondents, most of them did not have any objection with Thailand‘s brand as the country that is most famous for transgender people. Two respondents actually were proud of Thai‘s brand because they knew that some foreign people came to Thailand for transgender surgeries. Meanwhile, one of them even did not realize that Thailand is indeed famous in southeast Asian countries with its advanced facilities for transgender surgery. One respondent explained how Thai people can get along well with kathoey. Moreover, this correspondent compared transgender people in Thailand and in the United States, and concluded Thailand has better acceptance toward transgender people. Unlike the first question with various answers, most respondents did not know the answers for the second question concerning the percentage of transgender labors. They were not certain about the exact number of kathoey‘s labor. However, one of them predicted that it was about 2-5%, and most transgender labor lived in the capital city of Thailand, Bangkok. Kathoey mostly work in entertainment industries, bars, clubs, salons, and companies that are related to arts and beauty. Based on the respondent‘s points-of-view, most of them were seen in big cities. In addition to the number of kathoey‘s labor, respondents were asked to answer whether or not they had seen a case of transgender labor discrimination. Most of them basically had not seen a certain discrimination case directly. They heard about this issue from television, newspaper, and their friends. The types of discrimination cases were various. One explained that a big company once clearly stated that it did not accept transgender people as employees. Another respondent described that kathoey had been marginalized in terms of a specific occupation—transgender people could only work in the entertainment industries. The other respondent once saw the news that an insurance company refused to pay a transgender person‘s claim last year. Unlike other respondents, there was one that totally disagreed with transgender labor discrimination. This respondent even saw that some kathoey, which happened to be university students, working as engineers, architects, administrators in the university, secretaries and one who was a famous singer. In regards to a controversial statement of whether or not the government has been ignoring transgender people, two respondents admitted that there was a period of time when the 222 government did not pay attention to them. However, the government currently treats kathoey better as more and more people accept kathoey, excluding conservative people. In terms of limiting kathoey‘s access to work in public companies and government offices, one respondent y agreed that the government has been ignoring these people. Another respondent did not find that work seemed to be so difficult for transgender people because transgender people found that their expertise was in entertainment. In response to the issue of the government‘s ignorance of katheoy, the last respondent claimed that the government should allow these people to present themselves as what they wanted to be. Continuing to the next question about a specific law for transgender labor, most respondents noted that there was not any specific law that protected transgender labors as the government saw their physical gender. Thailand‘s labor regulation automatically covers its citizens once they get employment. In the case of transgender labor, they are included in the female gender and the law has covered their rights. Nevertheless, there is no specific policy for companies whether they want to hire transgender labor or not. More importantly, there are not any labor regulations that mentions penalties or sanctions for companies that do not accept transgender labor. The authors argue that this inadequate regulation presumes that the government does not fully protect transgender labor‘s rights. The last main question that was discussed was respondents‘ expectations toward the government‘s actions to improve kathoey‘s lives was countered unanimously with a huge support to better accept kathoey‘s differences. The respondents also expected that the government could provide equal opportunities for kathoey to work in public companies. Even though one of the respondents complained of kathoey‘s overreacting behaviors, all respondents agreed that people should not treat them differently. The most important point was not the policy that could guarantee transgender rights of security and equality based on one respondent‘s view. Yet, the implementation to better tolerate and accept kathoey‘s presence in any sector was exactly the point that transgender people wished to achieve. DISCUSSIONS In observing the respondent‘s perspectives about transgender labor‘s roles, the authors note that there are several reasons why transgenders are being put into a certain box of environment. First, either Thai society or the Thai government limits transgender labor‘s mobility in the workforce. They can only earn money by doing some work that are related to entertainment and beauty. Even though one respondent argued that some of kathoey work outside entertainment industries, it is difficult for them to work as public servants and clerks in public companies. The authors argue that the main cause is the society‘s reluctance to depict them as Thai representatives of governmental institutions. In some ways, both the government and the society do not truly accept their presence. In addition to the limitation of transgender labor‘s mobility, the absence of regulation that covers every Thai citizen at work is a possible cause of marginalizing transgender labor. This argument fosters an idea that the government is inconsistent to guarantee Thai labor to work in various kinds of industries including transgender labors. A concrete example is that there is no sanction for companies that obviously state that they refuse to hire kathoey. Furthermore, kathoey‘s inabilities to have good career development presume how obvious is the society‘s treatment in taking this group out of what the mainstream calls as a ―normal life.‖ Even though, most respondents were convinced that the situation of transgender people is better than in any other country. Also, they can get along well with normal people.. 223 There is a close relationship between consistent labor regulation implementation and transgender labor discrimination. One shares a role as a guarantee toward transgender labor and a means of enhancement to their roles in the Thai economic sector. Meanwhile, discrimination cases of these people will encourage both Thai government and society to fully comprehend and accept their presence as part of pluralism in the country. In ―Sisterhood is Powerful,‖ a chapter in Bell Hooks‘ Feminism Is for Everybody (2000), she discussed the importance of unity among women in the feminist movement in order to better confront the notions of a patriarchy system. Hooks theorized that together, young and old women would be able to resist systems that oppress and keep women disenfranchised (2000, p. 14). Even though Hooks is referring to Western feminism about the togetherness among Western women, the authors consider that her comment can be implemented to the case of transgender people in Thailand because of a solid organization movement of kathoey will provide them with equalities as well as opportunities in broader kinds of occupations. The last main concern about respondents‘ suggestions regarding transgender labor improvement, is that most respondents felt uneasy to criticize the government directly. It was shown when most respondents took some time before answering the question. They preferred to deliver their suggestions in a very polite and soft way—by intentionally choosing appropriate diction so that they would not feel as if they were blaming the government in some ways. In fact, they convinced the authors that the most essential part was that the society did not have any problems with transgender people. Moreover, the Thai government focused more on their physical gender, rather their sexual orientation. They were certain that work was fine for transgender people. However, the authors argue that with greater support from the government and Thai society, transgender people can better improve their lives and be able to compete with normal people in contributing their skills at both government offices and public companies. To summarize, three main points have been highlighted in this paper. They are Thai students‘ perspectives about transgender labor roles, discrimination and improvement in the future. These points were investigated by conducting interview sessions with the respondents, sending the designed questions via e-mail, gathering information from related references, and transcribing the results of the interviews. Based on collaborative information from both references and respondents, the authors conclude that transgender labor roles are invincible in which their mobility is restricted by public companies and government institutions. Concerning transgender labor discrimination, there was only small number of incidents that the respondents practically noticed. Yet, the authors argue that this is somewhat irrelevant logic for the government to not support them by implementing labor regulations consistently. Lastly, both Thai society and Thai government are two important factors that can help improve kathoey‘s lives. In fact, Thai society‘s role is significant for this community improvement—especially better respect of kathoey‘s differences in a plural community—as people in general get along well with this group. 224 REFERENCES adb.org: Key indicators 2007: Inequality in Asia. (2007). Retrieved April 27, 2008, from http://www.adb.org/Documents/Books/Key_Indicators/2007/default.asp Hooks, B. (2000). Feminism is for everybody. Cambridge, MA: South End Press. Kim,Y. (2008), Geography SE Asia 538. Class of Spring 2008, Athens, Ohio University. Jackson, P. A. (1998). Male homosexuality and transgenderism in the Thai buddhist tradition. In Leyland, W. (Ed.), Queer dharma: Voices of gay buddhists. San Francisco, CA: Gay Sunshine Press. Jackson, P. A. (2003). Performative genders, perverse desires: A bio-history of Thailand's same-sex and transgender cultures. Intersections: Gender, History and culture in the Asian context, 9. Retrieved May 15, 2008, from http://intersections.anu.edu.au/issue9/jackson. html. Peracca, S. et al. (1998). Can prostitutes marry? Thai attitudes toward female sex workers. Social Science and Medicine, 47(2): 255-267. Taywaditep, K. J. et al. (1997) Thailand. In R. Francoeur, (Ed.). International Encyclopedia of Sexuality, New York: Continuum. 225 THE REAL SECTOR EFFECTS OF THE ECONOMIC CRISIS AND GLOBAL HEALTH IN SOUTHEAST ASIA: STUDY CASE: INSURANCE MANAGEMENT IN INDONESIA Suciati Mega Wardani PT. Askes (Persero) Pasar Minggu Street No 117 South Jakarta Indonesia Phone (+62)21 7943239 Fax (+62)21 7946315
[email protected] ABSTRACT The global financial crisis started to show its effects in the middle of 2007 and into 2008. around the world, including Southeast Asia, stock markets have fallen, large financial institutions have collapsed or been bought out, and governments have had to come up with rescue packages to bail out their financial systems. Economic growth protection in Southeast Asia fell from 2007 until 2009.(based on IMF version-November 2008), The possible downside effects of the financial sector crisis are much more direct and substantial from the real economy implications. These will work through trade, remittances, and investments. INTRODUCTION Background and Problem The global financial crisis evolved from the bursting of the speculative bubble in the US housing market, as well as the failure of regulation and the lack of adherence to strict corporate governance principles in the United States. The crisis came to a head around 226 September 2008 and rapidly spread to other developed countries. The effect of the global economic crisis started to show its effect in the middle of 2007 and into 2008 on a worldwide basis, including in southeast Asia. The crisis first became evident in developing countries in the form of a decline in export volumes, a fall in commodity prices, and drastically reduced inflows of foreign capital and remittances. While the downturn has largely occurred in wealthier nations, the poor in low-income countries are likely victims. The financial crisis, which was triggered by difficulties within the sub-prime mortgage market in the USA, and which has seen the near collapse of the international banking system, still continues to spread. Many countries are known to be facing severe financial problems and world trade is shrinking. The recession is now virtually global as a knock-on effect in low-income and middle-income countries occurs. As richer countries buy less from low-income countries, revenues decrease, which lowers workers‘ incomes and raises unemployment. Health and social programs targeting the poor are often the first victims of budget cuts. Experience with past crises in southeast Asia and other regions shows that they may harm human development in four ways-by 1) increasing poverty, 2) worsening nutrition, 3) reducing the quality and supply of education and health service, 4) wiping out the meager savings and wages of poor people. The following are documented threats to children and families in each country: - Decline in family income as formal sector jobs disappear and workers take lower- wage employment in the informal sector. - Erosion of real wages through inflation sparked by currency depreciation, with a particular impact on the prices of food and medical supplies. - Declines in government revenue as the tax base - particularly imports and company profits – contracts severely limiting government capacity to maintain social expenditures. - The devastating effects of high costs of food and lower family incomes on early childhood nutrition, including poorer health. Lower cognitive abilities, less learning, and lower lifetime earnings. Total health spending in countries that has been affected by an economic downturn tends to fall, but not consistently. Some governments have protected health spending or even 227 increased it, but others have done the reverse. Policy in this sphere is thus vitally important. In contrast to public spending, private out-of-pocket expenditures usually tend to decline in a recession, particularly if services are available at lower cost in the public sector. Regarding the duration of the crisis, the current crisis has rapidly spread to the global economy. The actual duration of the recession depends on the speed and effectiveness of policies in the developed countries. The most immediate effects are likely to be through the scissors of rising health costs and diminished resources. The cost of imported health inputs rise because of depreciating currencies, resources shrink as lower incomes depress private spending on health and slower growth cuts into tax revenues that would otherwise be available for public health expenditure. In responses to questions raised on the impact of the crisis on global health, the purpose of the research paper are: 1. To build awareness of the ways in which an economic downturn may affect health spending, health services, health seeking behaviour and health outcomes. 2. To make the case for sustaining investments in health. 3. To identify actions – including monitoring of early warning signs – that can help to mitigate the negative impact of economic downturns. THE IMPACT OF CRISIS IN GLOBAL HEALTH Relationship Between Economic Growth and Health The reduction in poverty improves affordability and accessibility to health care. Improved health leads to enhanced productivity. Healthier people live longer and are more motivated to develop their skills. Increased life expectancy will encourage people to save more money for retirement which will then increase public investment. Economic Crisis and the Poor The poor in all countries will be the first and hardest hit. It is shown by the increasing in food prices which causes food crises. The other is the reduction of demand for commodities which 228 causes more unemployment, loss of income, and reduction of household spending on health. The effects of a financial crises are a fall in private financial flows, decreases in foreign direct investment and remittances, and exports from developing countries are down in price and volume. FIGURE 1. THE PROJECTION OF WORLD TRADE GROWTH Data source: World Bank The crisis undoubtedly has an impact on health in developing countries, with the most immediate effects through lower private spending on health as income growth slows and through tighter national budgets that constrains public health expenditures. Slower growth potentially affects the health sector. The crisis puts health systems in the scissors of rising costs and diminishing resources. Costs are likely to rise as currency devaluations occur in many countries as an unavoidable side effect of the crisis. Devaluations increase the costs in local currencies of all imported health expenditures: medicines, autoclaves, syringes, X-ray machines, and other hospital equipment. The degree of how this affects the various economies throughout the world depends on how well and how skillfully each country manages its available resources in terms of manpower, finance, equipment, facilities, and supplies. Policies can offset these effects. The level of available health resources should be accurately determined and thus should be equitable, efficiently and properly allocated and distributed based on available information and data on 229 the needs levels of care. Those that have proven most effective include: policies aimed at financing specific services used by the poor (vaccines, primary health care and nutrition programs), and policies expanding the coverage of safety net programs through low-cost insurance mechanism. Medicines and Health Care Commodities Where recession is accompanied by inflation and devaluation of domestic currencies, the price of imported medicines, raw materials and medical equipment will increase. There is evidence that the rise in the cost of care to patients can be controlled, particularly through public subsidies. Falling Remittance Income from remittances has held up well through some past economic downturns. How much is spent on health is uncertain, although remitters covering health expenses was the primary purpose of the money sent home. However these moneys are often used to meet the cost of long term or terminal illness or even funeral expenses. Thus a decline in remittance income may not be reflected in levels of population health, these expenses still have to be met. Borrowing locally at high rates of interest can lead to impoverishment or increasing levels of debt. Reductions in Household Income The economies of many low-income and middle-income countries have benefited from the rapid growth of export industries in areas such as ready-made garments, food and flowers, and business processing. As demand declines in developed economies, job loses are likely with consequences for family income and the ability to pay for health care. Utilization of Health Services Decreasing health spending, increased costs of treatment, and reduced family income affects use of health services and their quality. The most common effect is to lower demand for private care with a consequent transfer of demand to the public sector. If public services are 230 also compromised, they may not be adequately equipped to cope, and overall quality may decline. Health Outcomes The current food crisis in particular has been estimated as being responsible for pushing more people back into poverty with serious consequences for health outcomes and nutritional status. Shortages of food and consequent malnutrition predispose individuals to disease and thus act in vicious concert with the economic downturn. HOW TO OVERCOME THE CRISIS Mitigating the Health Impact of the Financial Crisis In the face of declining revenues and income, health care should be made as visible as possible. Health is an entitlement to which people have a basic right, as well as making a significant contribution to economic growth, poverty reduction, social development and human security. The financial crisis has provoked an examination of the values that underpin societies. The health response should also aim to be transformative and should be used to promote a greater focus on social justice. TABLE 1. ECONOMIC GROWTH IN SOUTHEAST ASIAN COUNTRIES, 2009 Country 2006 2007 2008 2009 Change of 2007-2008 Indonesia 5,5 6,3 6 6,4 (4,8) Malaysia 5,9 6,3 5,5 5,9 (12,7) Filipina 5,4 7,3 5,9 6,1 (19,1) Thailand 5,1 4,8 5 5,4 4,2 Vietnam 8,2 8,5 8 8,5 (5,9) Data Source: World Bank, 2009 231 From table1 we can see that economic growth in some South East Asian countries are in downturn except for Thailand. The importance of health for economic growth and reduction of poverty is reflected. To ensure universal and equitable access to quality health services, governments must provide a sufficient share of public revenues for health. A key characteristic of the current crisis is the speed with which it continues to evolve and consequently the uncertainty facing policy-makers. Partnerships will be critical. Rapid assessments, effective communications, exchanges of experience, effective and flexible working arrangements will all be essential to success. Monitoring the Impact of the Crisis. Given the rapid evolution of the crisis and the uncertainty surrounding its impact in different countries, monitoring its effect is a priority. The purpose of monitoring is to identify the most vulnerable countries and populations before people are exposed to risks that will affect their health. Specific efforts to monitor the impact of the crisis will complement existing, and longer term efforts to monitor health outcomes. Saving Lives and Protecting Incomes The first priority in any country facing an economic downturn is to protect the lives and livelihoods of those most at risk. In term of policy actions, social safety nets which support the poor will be a priority. The more serious the downturn, the greater the priority should be given in this area. Increasing the Effectiveness of Spending for Health Economic recession makes the tasks of defending health budgets more difficult. In countries affected by the financial crisis, recapitalizing banks and other financial institutions may be given priority. In countries affected by economic recession, sectors that generate employment or increasing agricultural production will seek additional funding. Strategies need to take into account spending outside as well as within the health sector. Where resources for a significant fiscal stimulus are available, counter cyclical public spending is seen as vital for reviving the economy. Although the primary aim of such 232 programs is to create or maintain employment, it is important to seek ways in which they can positively influence health. Health-policy makers should be assertive in seeking a seat at the table when public spending plans in these areas are being developed. There is no doubt that primary health care, and its central objective of moving towards universal coverage, remains compelling as an approach to health policy at a time of economic crisis. Primary health care requires a focus on equity, solidarity and gender. It reminds policy-makers, for example, that the high burden of maternal mortality is a result of many factors including poor access to care, failure to prevent unwanted pregnancy and women‘s low status in some societies. Primary health care gives direction to work on health systems, reinforcing the idea of solidarity through progress towards the goal of universal coverage. This is particularly important given the increasing pressures on public services and the need for ways of reducing exclusions. Pooling risk and resource-central to the notion of universal coverage. Because it is not only protect people from catastrophic expenditures, it also facilitates greater allocative efficiency and more effective resource use. In times of economic hardship a more joined up approach to health and public policy is essential. Health is an outcome of actions across many sectors of society. Primary health care stresses the importance of the social, economic, and environmental determinants of health, such as essential medicines and technologies, and the restriction on the movement of peoples or goods to prevent the spread of epidemics. Primary health care does not focus exclusively on the public sector, but acknowledges the role that non-state providers-private, voluntary, faith, and community-based play in providing a significant proportion of services in many countries. Public involvement and transparency are central to the primary health care approach. If the public, civil society and parliaments are involved, decisions on how to make health spending more effective are more likely to be rational and accepted than if they are left to bureaucracies alone. Health Finance Policy and Insurance Management in Indonesia 233 As in other developing countries, Indonesia is facing problems of access, equity, efficiency, quality of health services and approximately 70 per cent of health care expenditure is currently ―out of pocket‖. These problems have been exacerbated by the economic crisis. The most vulnerable and affected group during the struggling finance phase is the poor. For the poor, the risk of severe illness and earlier death from disease is considerably higher than for those who are financially better off. They are also less able to recover from the financial consequences of ―out of pocket‖ payments and loss of incomes associated with ill health. For most people illness still represents a permanent threat to their income earning capacity. Besides the direct costs for treatment and drugs, indirect costs resulting from the lost labor of the ill have to be shouldered by the household. The poor do not just undergo the high risk in their environment, they actively try to manage risk and cope with its consequences. Delayed treatment, self medication or even doing nothing are among their choices. The emergence of the Indonesian health insurance systems was influenced by the above mentioned problems. The crisis has raised awareness and concern over sustainable health care financing in Indonesia. Government is increasingly realizing the value of developing health systems that provide health care while financially protecting the people in the fairest way possible. To protect the poor and by reducing ―out of pocket‖ payments, the central government started in 1998 with the development of pro-poor policy such as social safety net for health (JPS-BK). The government has also developed a health financing scheme namely the Jaminan Pemeliharaan Kesehatan (JPK). In 2003, a pilot project started in 15 districts and three provinces in Indonesia, and the following year was expanded to some additional regions. The name of this program has changed several times. In 2005, it was known as Health Care Security for the Poor (JPK-MM), then became Health Insurance for the Poor (Askeskin) and it was also known as Community Health Security (Jamkesmas) since 2008. Government‘s commitment to ensure that health care is accessible for the poor through this scheme is much appreciated.with a slogan ―health for the people‖ and funded by central government budget (APBN), JPK-MM Askeskin has implemented as a step toward universal coverage. A question that remains of paramount importance in a majority of the world‘s countries is how their health financing systems can provide sufficient financial risk protection to all of the population against the costs of health care. Increasing utilization of health care 234 will increase the cost of a health insurance scheme. While the spending is increasing the health provider is unable to provide this within the Jamkesmas budget, and local government has a responsibility to finance the gap. It can be a burden for a local government (APBD) in a low fiscal area. Health care programs in Indonesia through social health insurance are provided by PT. Askes (Persero). Askes is a compulsory health insurance scheme for active and retired civil servants, retired military and police officers, veterans and national patriots, and their families. The Ministry of Health and local authorities run public health care systems for the uninsured through Jamkesmas and Jamkesda (local government initiatives) which is handled also by PT. Askes (Persero). All the health insurance companies in the world were facing the same condition when the economic crisis happened, that is the rapid increase of health care costs and PT. Askes (Persero) is also doing the same. Providing equal access to high quality care is one of the main objectives of the company. The aim is to achieve the highest possible standards of health, which implies that the system is able to respond to the expectations of the population, to reduce the differences between individuals and groups to a minimum, and to guarantee the same quality of treatment for all people. The issues at stake are the quality of treatment and access to health service in the face of scarce resources, essential needs, and control of the trend towards ever increasing costs. All of those conditions have influenced the increase of health cost, access to health service in the matter of affordability of the people, quality and effectiveness of the health care provided . Facing that reality, as the biggest health insurance company with more than forty years experience, PT. Askes has to try to create reliable policies and strategies in order to survive and be a growing company and also to support the achievement of the health insurance with universal coverage as well as avoiding the liberalism of the health sector. Health Reformation in Indonesia Indonesia is transitioning through major reform ―the implementation of universal health insurance coverage‖. The ultimate goals of health reform are to improve health care accessibility, quality, sustainability, and efficiency. Within this framework, the purpose of the 235 reform is to improve health outcomes, to provide Indonesians with financial protection from impoverishment resulting from large, unexpected health care costs, and ensure responsiveness of the system to consumers. The health insurance scheme for the poor has made a significant impact on reducing financial barriers of the poor. The national health insurance scheme provides the free access to health facilities without any co-sharing even of part of the benefit package. It has marked a commitment of the Indonesian government to provide its entire population with health insurance coverage through a mandatory health insurance scheme. In scaling up to achieve universal coverage through a mandatory contributory health insurance scheme, government needs to design a policy to facilitate the aim. To allow eligible members access to health care, membership management needs to be improved. Validation of data on those who are eligible for the scheme is needed and criteria should be clearly defined. PT. Askes (Persero) is a state-owned enterprise, which was established in 1968 by the Indonesian government for administering a mandatory health insurance scheme for civil servants, veterans, national independence pioneers, military, and police retirees along with their dependents. Up to now the numbers of the compulsory membership have reached 16.3 million people. In its development period, the company is also allowed to run commercial / voluntary insurance for the employees of private companies, state-owned enterprises, local government-owned enterprises and other institutions which at present account for a membership of 1 million people. Besides the number of Jamkesmas membership has reached 72 million people. This means that more than 89 million Indonesian people are currently covered by health insurance. The health insurance program provided by PT. Askes (Persero) is based on the concept of ―managed care‖ where it applies an integrated system of financing and delivery of appropriate health care services in order to produce quality care and efficiency. The characteristic of PT. Askes (Persero) managed care in carrying out the health insurance is as follows: - Comprehensive health care based on the medical needs. - Structural services and referral system, which provide the primary health care at the family doctor or at the public health centers, are regarded as the ―gate keeper‖ 236 - Selected health provider for PT. Askes (Persero) members is the health care provider contracted by PT. Askes (Persero). - Selected drug is the drug listed in the drug and ceiling price list (DPHO) of PT. Askes (Persero) - Together with the hospitals PT. Askes (Persero) is undertaking programs of management improvement. The benefit for PT. Askes (Persero) compulsory members is comprehensive based on the medical needs covering the promotive, preventive, curative, and rehabilitative areas. The services given are provided structurally and gradually apply the regional and referral concept. The package is equal for all members and there is no limitation in the medical services, costs as well as the length of stay in hospitals. The benefits extended to the voluntary members varies according to the agreement between PT. Askes (Persero) and the appropriate member‘s employer. The premium for PT. Askes (Persero) compulsory members is decided by the government at the amount of 2 percent of basic salary. While the premium for the voluntary members is decided by conformity with the benefits package purchased being determined based on the community rating. There is no difference on the services for the compulsory and voluntary members in principle, that is managed care approach. Social Askes Program TABLE 2. PRODUCTIVITY OF SOCIAL ASKES PROGRAM (million) Description 2003 2004 2005 2006 2007 2008 Premium Income 1,912,603 2,072,849 2,549,885 3,307,614 4,313,311 5,622,611 Health Service Cost 1,185,861 1,469,789 1,928,278 2,351,822 2,941,272 3,095,353 Returned Income 313,836 2,445,445 181,931 402,400 663,642 1,136,882 Data source: management report of PT. Askes (Persero), 2008 From table 2, we can see that the realization of Social Askes premium of 2007 was Rp 4,331,311 million, increasing Rp 1,005,697 million or 30,41 % from 2006. The realization of Social Askes premium of 2008 was Rp 5,622,611 million, increasing by Rp 1,309,300 237 million or 33,63 % from 2007. The data shows that global economic crisis has not affected premium income of Social Askes Program, besides the prospective of health prosperity received by the members increased through health insurance. The data shown that the impact of global economic crisis has not affected the compulsory members program. Commercial Askes Program TABLE 3. PRODUCTIVITY OF COMMERCIAL ASKES PROGRAM Description 2006 2007 2008 Member 1,909,662 2,133,369 1,271,082 Enterprise 2,577 2,417 2,121 Member Lapse 502,846 392,153 974,703 Data source: management report of PT. Askes (Persero), 2008 From table3 above, we can see that the number of Commercial Askes Program (voluntary members) from 2006 to 2007 increased by 223,707 people or 11,7%. In the meanwhile the number of Commercial Askes Program (voluntary members) from 2007 to 2008 decreased by 862,287 people or 40,4%. The number of enterprises cooperating with PT. Askes (Persero) in health insurance coverage from 2006 to 2007 decreased by 160 or 6,2 %. Moreover the number of enterprises cooperating with PT. Askes (Persero) in health insurance coverage from 2007 to 2008 decreased by 296 or 12,2 %. The data shows that the impact of global economic crisis has affected the voluntary members program. This was caused by the inability in the private sector to pay the premiums. This must be considered by the government in implementing universal coverage for all Indonesian citizen. CONCLUSION Experience with past crises in southeast Asia and other regions shows that they may harm human development in four ways-by 1) increasing poverty, 2) worsening nutrition, 3) reducing the quality and supply of education and health service, 4) wiping out the meager savings and wages of poor people. The crisis undoubtedly has an impact on health in developing countries, with the most immediate effects being through lower private spending 238 on health as income growth slows and through tighter national budgets that constrain public health expenditures. Slower growth will affect the health sector. The crisis has put health systems in the scissors of rising costs and diminishing resources. Costs are likely to rise as currency devaluations occur in many countries as an unavoidable side effect of the crisis. The degree of how it will affect the various economies throughout the world will depend on how well each country will manage its available resources in terms of manpower, finance, equipment, facilities, and supplies. Policies can offset these effects. Indonesia is transitioning through major reform to ―the implementation of universal health insurance coverage‖. The ultimate goals of health reform are to improve health care accessibility, quality, sustainability, and effectiveness. Within this framework, the purpose of the reform is to improve health outcomes, provide Indonesians with financial protection from impoverishment resulting from large, unexpected health care costs, and ensure responsiveness of the system to consumers. PT. Askes (Persero) is a state-owned enterprise, which was established in 1968 by the Indonesian government for administering a mandatory health insurance with universal coverage. PT. Askes (Persero) implements and support the policies and programs of the government in the area of the economy and national development in general. To attain this, the company has to implement a comprehensive health insurance with health managed care programs in accordance with medical needs to increase the benefits to all stakeholders and to support the socio-economic growth of the nation. 239 REFERENCES Pain L.H.W and F Siem Tjam. (1988). Hospital and The Health Care Revolution, Geneva. PT. Askes (Persero). (2007). Annual Report 2007. Jakarta PT. Askes (Persero). (2008). Annual Report 2008. Jakarta Ridha, Kechrid Mohamed. (2001). Improving Access to Efficient Health Care in Developing Countries: Telemedicines and Other Possibilities. France Sutadji, Orie Andari. (2002). The Impact of Private Sector Involvement on Health Insurance in Indonesia. Jakarta 240 APPENDIX What health facilities provide the services? - Health center and other primary health facilities - Government hospitals - Military, police and private hospitals - Pharmacies - Optical What health services are provided by PT. Askes (Persero)? 1. Primary care 2. Hospital outpatient or ambulatory care 3. Hospital inpatient care 4. Birth delivery 5. Drugs 6. Health equipment covering: - Eyeglasses - Dentures - Hearing aids - Prosthesis - Implant 7. Surgery including heart and lung surgery 8. Haemodialysis 9. Kidney transplantation 10. Supporting diagnostic measures (USG, CT scan, MRI) 241 THE ROLE OF BANJARESE CULTURE TO IMPROVE PERFORMANCE AND COMPETITIVE ADVANTAGE THROUGH ISLAMIC ENTREPRENEURSHIP AND STRATEGY - SMALL AND MEDIUM ENTERPRISES IN JEWELLERY AND GEM STONES AT MARTAPURA, SOUTH KALIMANTAN, INDONESIA Hastin Umi Anisah Brawijaya University Malang Indonesia
[email protected] ABSTRACT Purpose – The purpose of this paper is to study and examine the relationship between Banjarese culture, Islamic entrepreneurship, strategy, performance, and competitive advantage on small-to- medium sized enterprises (SMEs) in one part of Indonesia, which produces jewellery and gem stones. Theoretically, this study sees unification between Banjarese culture, Islamic entrepreneurship, and strategy. This study focuses exclusively on two specific strategy types: quality strategy and innovation strategy, and their relationship to performance and competitive advantage. Design/methodology/approach –The method of analysis uses both quantitative and qualitative approaches known as mixed methods or the pragmatism paradigm. Participants are owners, leaders, and entrepreneurs who have had businesses in jewellery and gem stones, and also the researcher. In the quantitative approach 112 respondents were interviewed using questionnaires and identifying nineteen research variables and these were analysed using SEM. In the qualitative approach ten participants were interviewed .These were key persons who had experience in the jewellery and gem stones business and this analysis used the phenomenology approach. Findings – The research findings demonstrate that Banjarese culture, Islamic entrepreneurship, and strategy have influenced and improved performance and competitive advantage of SME’s. The Banjarese culture has improved performance and competitive advantage through Islamic entrepreneurship and strategy. Performance has a significant impact on competitive advantage and competitive advantage has no significant impact to performance. Practical implications – The findings of the study are useful for lecturers, owners, and practitioners. Limitations - The findings of the study only discuss Islamic entrepreneurship and Banjarese culture. Original/value – The paper is a part of a study indicating that Banjarese culture has improved performance and competitive advantage through islamic entrepreneurship and strategy. Keywords: Banjarese culture, islamic entrepreneurship, strategy, performance, competitive advantage. 242 INTRODUCTION The economic structure of Indonesia entered a new phase in which small and medium micro enterprises (SMEs) became the main pillar of economic strength that proved resilient in the global economic crisis. According to the Office of Observation Depperindag (2003), the Indonesian economy during 2000 was less profitable. The global economic crisis that occurred in 2008 that began in the United States is different from the crisis of 1998. Small-to-medium enterprises (SMEs) must have an early strategy to be able to compete. According to Kasali (2008) sooner or later the impact of the economic crisis will be felt by Indonesian SME‘s. Kasali further suggested that it is necessary for SMEs to have a proactive strategy to deal with this crisis once it occurs. This proactive strategy includes 1) Public Health needs to find substitutes or alternative raw materials, especially imports in order to obtain a more affordable price. However, the quality must be maintained so the added value of products does not decline, 2) making a breakthrough in the purchase of raw materials as cheaper alternatives. SMEs should avoid brokers who do not offer competitive prices, 3) efficiency strategy, namely by conducting large-scale efficiency by evaluating companys‘ operational costs. For example the efficient use of electric energy or other fuel, 4) marketing strategy, namely to expand the marketing strategy, by reducing reliance on large numbers of buyers or large buyers. Implementing a retail market "cash and carry" market is usually a more secure payment risk, and 5) inviting retailers to review trading terms so that business can be effectively and more equally developed. SME‘s development is a complex and dynamic problem because it involves many factors both internal and external changes from time-to-time. Management of environmental factors has to achieve high performance and developing competitive advantage requires a specific strategy. Porter (1992) suggests that there are two theoretical views on the relationship between environmental factors and strategies, namely the deterministic environment and environmental management. The deterministic perspective indicates that environmental management has a deterministic influence and the strategic decisions that companies make must be adapted to the opportunities and threats in the environment. The SME‘s sub-sector is the sector where democracy is important and this sector has a strategic role in economic development in Indonesia. The strategic position of SME‘s is important because it has several advantages over big businesses, among others, it is able to absorb more workers and uses local resources, and efforts are relatively flexible. BPS (2004) and the Ministry of Cooperatives and SMEs, in Indonesia indicated there were 42.39 million SME units or a total of 99.9% of the existing business units. Labor was absorbed in the efforts of SME‘s amounted to 79.04 million people or 99.4% of the total work force there and contributed 56.72% of total GDP. Competition is basically the core of the success or failure of a company. It can determine the accuracy of company activities that can sustain performance, by innovation, cultural cohesiveness, or execution. Competitive strategy is searching for a favorable competitive position in an industry, the fundamental arena where the competition occurs. Competitive strategy aims to establish a profitable position and it can be defended against the forces that determine industry competition. There are two 243 basic types of competitive advantage which are; cost advantage and differentiation. Porter (1994) argues that competitive advantage in an industry can be strongly enhanced by interrelationships with business units competing in related industries. Bacon and Hofer (2003) stated that the new company should adopt low-cost strategy to develop the competencies to achieve competitive advantage against competitors. Achievement of performance is largely determined by the effectiveness of managerial actions through capability in the development of a strategy to neutralize the negative effects of industry competitive forces (Metts, 2007). Organizational resources, combined with a strategy are necessary to strengthen the quality of corporate performance (Edelman et al., 2002). SMEs play an important role in the Indonesian national economy especially with respect to labor absorption, nevertheless in exports and in value-added, SMEs are lower than that of medium and large-scale enterprises. Low performance of Indonesian SMEs is caused by many factors that are basically systemic from the external environment, firm resources, entrepreneurial skills, culture and strategy in Indonesian SMEs. These factors also affect the competitive advantage of SMEs in the international market. It is very important to improve the performance and competitive advantage of SMEs in facing competition especially from free trade agreements. The purposes of the study are to analyze and examine: (1) the impact of Banjarese culture on performance and competitive advantage, (2) the impact of Islamic entrepreneurship on performance of SMEs, (3) the impact of strategy on competitive advantage of SMEs, (4) the impact of Banjarese culture on Islamic entrepreneurship, (5) the impact of Islamic entrepreneurship on strategy, (6) the impact of Banjarese culture on strategy, (7) Have Islamic entrepreneurship and strategy mediated relation between Banjarese culture, performance, and competitive advantage? (8) the impact of performance of SMEs on competitive advantage, and (9) the impact of competitive advantage on performance of SMEs. THEORETICAL FOUNDATIONS Banjarese Culture Ethnic Banjar is the tenth major ethnic area in Indonesia (Syarifuddin , 2000), which in 2000 amounted to 3.496 million people with an average population growth of 1.94%, higher than the growth rate of ethnic Javanese, Bugis and Chinese. Banjar ethnics live in almost every province in Indonesia except in the Province of West Sumatra. Ethnicity is the largest group of approximately 76.34% of all Indonesian citizens in South Kalimantan province. Banjarese ethnics are divided into 3 sub tribes, namely: Pahuluan Banjarese, Banjarese Batang Banyu and Kwala. Their main work is farming and trading. Developing a commercial character is considered necessary because for people who live in the Banjarese valley of the river Nagra (Batang Banyu), it is not possible to farm, so they have developed and marketed craft products. 244 This is also in line with their needs as various products are not already produced in this region. Thus, their efforts have led to a market-orientation so that there has been the gradual formation of a merchant class of entrepreneurs. Because of their culture, the Banjar society does not only, however, demonstrate a commercial or materialistic character but also a spiritual character . Alfani (2000) stated that the ethnic Banjar has the following characteristics: 1. Believes that he must fight to stay alive and to work to live well. They are hardworking and work hard to achieve prosperity. But because of the orientation , their future emphasis is on the Last Day, then the hard work is limited to a moment they achieve quite a prosperous life, and since then they begin to live in a more relaxed fashion and are more engaged in the practices of religion. 2. Banjarese people of more traditional societies, have not perceived a view of requiring them to escape the confines of a spiritually-based culture and they accept the notion that honesty is the mainstay. Among the Banjar , personal satisfaction is not seen as a function of work, so they are quite happy if people appreciate their work or even selling it, the quality of work could be improved.. Banjarese are individualistic, competitive, overrate their own abilities and look down on other people's role to the success of their businesses. Maintaining good relations with other people is not very important, so it is difficult to foster cooperation. Future orientation or the pressure of the next day sometimes results in someone who actually still has the potential to expand his business, because his life is prosperous enough, he they may actually reduce his worldly activities in order to pursue the practices of religion. In fact there is a fatalistic attitude failing to accept reality that it is necessary to adjust his life because of these spiritual values. This is a means of avoiding responsibility and decision making. For communities with low incomes, individuals tend to be individualistic, life is a challenge and there is skill in maintaining good relations with other people. This type of attitude may detract from commercial activity. Strategy, Performance and Competitive Advantage Firms build competitive advantage by utilizing unique sets of resources and strategies (Wernerfelt, 1984; Barney, 1991). Resources are heterogeneous, and typically include all assets, capabilities, processes, and knowledge controlled by a firm that enable it to conceive and implement strategies to improve effectiveness (Barney, 1991; Grant, 1991). In contrast, strategies are the ways in which firms relate to their environment (Porter, 1985). They are the building blocks of managerial decisions and actions that determine the long run performance of an organization (Wheelen & Hunger, 2000). Small firms have insufficient or inaccessible resources, which may limit the range of feasible strategic alternatives (Hofer & Sandberg, 1987; Porter 1985). In addition, small firms 245 competing in highly populated industrial sectors may be unable to differentiate their strategies due to low barriers to entry (Wright, Smart & McMahan, 1995). Porter (1992) provides strategies in the face of competition known as the generic competitive strategies (Generic Competitive Strategies). Generic competitive strategies are based on the analysis of a company's position in the industry, whether corporate profits are above or below the industry average. A good company will have high income levels, although a less favorable industry structure usually means that the average industrial profit level is only medium. To achieve higher levels of commercial success,, companies can have two basic types of competitive advantage, namely low cost or differentiation. Two basic types of competitive advantage combined with a field of activity sought to be achieved by a company may lead to achieve performance above the industry average with cost leadership, differentiation, or focus. The strengths or weaknesses that are a feature of a company are ultimately functions of the relative costs and effects of differentiation. Implications of Porter' s generic strategies in small industries, are how small businesses operate with low cost or differentiation in terms of service. Cultural Relations with Entrepreneurship Culture is the actualization of the business behavior of a businessperson, because the decisions made by a person are affected by their cultural identity. Pragantha (1995) mentions that the company backgrounds of different cultures have an affect on management of different business. The elements are the differences in cultural patterns that are typical in management. This condition is determined by ethnic, religious teaching, the diversity of language and geographical factors. This is consistent also with the statement by Waldinger et al, 1990 (Masurel et al., 2002) that some ethnic groups have cultural norms that define some understanding of economic behavior and the appropriate expectations in the background of a job. Researchers such as McGrath, McMillan, Yang and Tsai, 1992; Mueller and Thomas, 2001 (Kreiser, 2002) state that cultural attributes can have a strong impact on the formation of entrepreneurial behavior, in addition, research by Knight, 1977 shows that only countries with specific cultural tendencies will produce a strong entrepreneurial orientation and therefore will have more entrepreneurial activity and global competitiveness. Also Geletkanycz (1997) argues that differences in views and assumptions that are embedded in a national culture are not only reflected in managerial attitudes and beliefs, but also in behaviors and activities that every member of the organization play in their respective roles. Mueller and Thomas (2001) also theorized that national culture may be responsible for encouraging a person to engage in unusual or different behavior from in other countries. If national culture affects the strategic orientation displayed by this organization, then the possibility of national culture determines the level of entrepreneurial orientation of a company as a whole. 246 METHODOLOGY This research was conducted using two methodologiess, qualitative and quantitative. It was conducted in two phases. Initially an exporatory study was undertaken of 634 SME‘s. In this phase of the study, SMEs were identified as having less than 100 employees, in accordance with accepted operationalization of Small to Medium Enterprises (SMEs). Then quantitative methods using SEM (Structural Equation Modeling) were analysed. Qualitative methods using a phenomenological approach were used to analyse in depth interviews. RESEARCH FINDINGS This study emphasizes the role of the local culture of Banjar in improving the performance and competitive advantage of SMEs by Islamic entrepreneurship and strategy. The results of the analysis of hypothesis testing is described as follows: 1. Banjar Cultural Influence on Performance and Competitive Advantage: Culture improved Performance and Ability to Increase the Competitive Advantage of SMEs. Culture is the actualization of the business behavior of a businessperson, because the decisions made by a person are affected by cultural identity. Pragantha (1995) mentions that the company backgrounds of different cultures have an affect on the management of different businesses. The elements are differences in cultural patterns that are typical in management. This condition is determined by ethnic, religious teaching, the diversity of language and geographical factors. This is consistent also with the research by Waldinger et al, 1990 (Masurel et al., 2002) that some ethnic groups have cultural norms that define some understanding of economic behavior and the appropriate expectations in the background of a job. These results show that the Banjarese culture has not had the ability directly in improving the performance of direct and competitive advantage. The results are consistent with the characteristics of more traditional Banjarese culture which has not perceived a view of requiring them to escape the confines of a spiritually-based culture and accept the notion that honesty and integrity in business is the mainstay. (Daud, 2000). Chrisman (2002) studied national culture and is applied this to the representatives of small firms in various States of the USA and he studied performance at the entry level .and local cultural differences.. 2. Entrepreneurship Islamic influence on Performance and Competitive Advantage: Increasing Application of Islamic Entrepreneurship can Improve Performance and Competitive Advantage of SMEs Islamic entrepreneurship in Indonesia has not had the ability to directly in improve the performance of SMEs. This is different when the Islamic entrepreneurship has the ability to improve competitive advantage of SME‘s indicating that Islamic entrepreneurship has the ability to improve competitive advantage. This means that the influence of the Islamic entrepreneurship 247 variable of competitive advantage of the higher Islamic entrepreneurship will directly enhance competitive advantage. 3. Influence Strategies for Performance and Competitive Advantage: Increasing Implementation of Strategy can improve Performance and Competitive Advantage SME‘s. These findings show that a stronger perception of strategy will directly improve performance. Similarly, with competitive advantage, the stronger the perception of the strategy will directly enhance competitive advantage. The results of this study are consistent with research conducted by Snow and Hrebiniak (1980) who found a significant relationship between corporate strategy and business performance. The same thing is also found in studies conducted by Kudla (1980) and Robinson and Pearce (1983) which state that strategy is useful to keep, maintain, improve performance and competitive advantage an organizations. This study's findings also support the results of research conducted by Terziovski (2002) that examined the relationship between an integrated strategy, Bottom-Up strategy, and Top-Down strategy with performance, where performance excellence is characterized by customer satisfaction, productivity, and technological competition. The results of these studies concluded that the bottom-up continuous improvement strategy is the most appropriate strategy to increase customer satisfaction and productivity of companies in Australia and New Zealand. The results of this study indicate that a continuous incremental improvement strategy is the main controlling strategy in an effort to improve and radical innovations should be used to make the leap to the products, services, and critical processes. 4. Banjarese Cultural Influence on Islamic Entrepreneurship: Increasing Application of Banjarese Can Improve the Culture of Islamic Entrepreneurship. Culture is the actualization of the business behavior of a businessperson, because the decisions made by a person are affected by cultural identity. Pragantha (1995: 33) mentions that the company backgrounds of different cultures may have a bad affect on management of different businesses. The elements are differences in cultural patterns that are typical in management. This condition is determined by ethnic, religious teaching, the diversity of language and geographical factors. This is consistent also with the research of Waldinger et al, 1990 (Masurel et al., 2002) that some ethnic groups have cultural norms that define some understanding of economic behavior and the appropriate expectations in the background of a job. Researchers such as McGrath, McMillan, Yang and Tsai, 1992; Mueller and Thomas, 2001 (Kreiser, 2002) state that cultural attributes can have a strong impact on the formation and entrepreneurial behavior, in addition, research by Knight (1977) showed that only countries with specific cultural tendencies will produce a strong entrepreneurial orientation and therefore will have more entrepreneurial activity and global competitiveness. This study shows that the Banjarese culture has the ability to improve Islamic entrepreneurship. This means that the stronger the Banjar culture will enhance the Islamic 248 entrepreneurship. In other words, the stronger the cultural values of the Banjarese present in a Muslim entrepreneur / owner of an SME is to further improve the Islamic entrepreneurial activity because of the values in Banjarese culture which contain the values of Islamic teaching. These results are consistent with studies conducted by several researchers such as McGrath, McMillan, Yang and Tsai, 1992; Mueller and Thomas, 2001 (Kreiser, 2002) which indicate that cultural attributes can have a strong impact on the formation of entrepreneurial behavior, in addition, research by Knight (1977) indicated that only countries with specific cultural tendencies will produce a strong entrepreneurial orientation and therefore will have more entrepreneurial activity and global competitiveness. In this study, the culture studied is a very strong Banjarese one with Islamic values so that the Banjarese culture is very influential and produces an Islamic contribution to entrepreneurship which is applied by the owners of Gem and Jewelery SMEs in Martapura. 5. The influence of Islamic Entrepreneurship Strategy: Increasing Application of Islamic Entrepreneurship can improve Strategy. Entrepreneurship has always existed since humans began to roam the earth and then have continued throughout history. Even the Prophet Muhammad was known as an entrepreneur. "Muhammad was a true entrepreneurial figures". Prophet Muhammad is a model for Muslims, he was a trader who was very tough and professional, honest, trustworthy, and reliable. Even his personal credibility and integrity as a trader gained recognition, not only from Muslims but also from Jews and Christians. He wanted others to trust Muslem people. Honesty and loyalty has its meaning from the Arabic word 'al amin', a nickname given to the Arabs at the time to Muhammad. These findings show that there is a strong direct influence of Islamic entrepreneurship and this will improve strategy. On the other hand a decrease in Islamic entrepreneurship will lower the level of strategy. The results of this study are consistent with research conducted by Covin & Slevin (1990) which states that the stronger the human resources, these will be incorporated in the innovation strategy. In addition this study also shows that the Islamic entrepreneurship among others consists of daring to take risks, and that creativity and innovation are necessary to achieve the strategy. This is in line with research conducted by Chandler and Hanks (1994) which states that small companies need to try to develop a strategy that requires workers' creative and innovative activities to maintain relationships with customers and to have strong marketing and technical skills. 6. Banjarese Cultural Influence on Strategy: The increasing application of Banjarese culture can improve the strategy. Banjarese culture can improve strategy. These findings show that there is a direct influence of cultural variables of Banjarese culture on the strategy variables which will enhance the strategy. Source strategies of small firms appear more from the sources of human capital, capabilities and competencies (Hitt and Reed, 2000). Critical resources, especially in small companies held / 249 conducted by individual entrepreneurs or their organizations (Mosakowski, 1993). The same aspect is also expressed by Miller and Friesen, (1984) who states that all human resources have a direct impact on product strategy / market. The results of this study show that the culture of the Banjar people can be an agent in improving entrepreneurship and business strategy.. 7. Banjarese Cultural Influence on Performance and Competitive Advantage through Islamic Entrepreneurship and Strategy: Entrepreneurship and Strategy Mediating Islamic Relations between the Culture on Banjarese, Performance and Competitive Advantage. The research findings show that when the variables include Islamic entrepreneurship and strategies for intervening variables, it has a different impact on different aspects of Banjarese culture, performance and competitive advantage. The results indicate the need for further discussion and research further discussion as follows: Increased Banjarese culture can improve strategy. While indirect effects through intervening variables of Islamic entrepreneurship also produce a significant point. Banjarese culture has no direct ability to improve performance, and it cannot directly improve performance through Islamic entrepreneurship and competitive advantage, while indirect effects through intervening variables strategy can indirectly improve the performance of SMEs. Banjarese culture cannot directly increase competitive advantage. While indirect effects through intervening variables of Islamic entrepreneurship, strategy and performance can do so. Judging from the amount of produced coefficients it can be concluded that the indirect effect through intervening variables of Islamic entrepreneurship is stronger than strategy and performance. This means that the entrepreneurial culture with Islamic Banjarese can increase competitive advantage SMEs. Islamic entrepreneurship cannot directly improve performance. While indirect effects through intervening variables of strategy and competitive advantage can do so. On the other hand the indirect effect through intervening variables is competitive advantage. The increasing application of Islamic entrepreneurship can enhance competitive advantage. This means that there is a significant positive influence of the Islamic entrepreneurship variable of competitive advantage that is higher then the Islamic entrepreneurship can enhance competitive advantage. While indirect effects through intervening variables do influence strategy. and performance. CONCLUSIONS AND RECOMMENDATIONS Based on the answers to the research question and taking into account the results of the analysis and discussion, the conclusion can be drawn that the increased application of Banjarese culture cannot directly improve the performance of SMEs, but the impact can indirectly affect strategy. 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Academy of Management Journal. 38:4, 1052-1074 253 MODEL OF KNOWLEDGE CREATION IN A COMPANY: STUDY AT MODERN COSMETICS COMPANIES IN INDONESIA Ningky Sasanti Munir Sekolah Tinggi Manajemen PPM Jl. Menteng Raya 9 Jakarta 10340 Indonesia Ph. (021) 2300313 Fax. (021) 3909311 Email.
[email protected] ABSTRACT A study has been conducted to identify, analyze and elucidate the structure of knowledge creation model in 43 fully-fledged Indonesian companies that develop, produce and sell their proprietary - not licensed – cosmetics. The research revealed that the commercial benefits enjoyed by a company from innovative outputs are directly affected by new knowledge creation. In addition, in order to create new knowledge, a company conducts not only exploitation but also exploration through information and knowledge acquisition activities from an external information source network. As `learning’ entities, cosmetic companies change and actualize their actions after critically challenging their products and routines based on newly acquired information and knowledge. This research demonstrates that there is a link between knowledge and information acquisition, problem solving and decision making activity and knowledge creation. It means that the innovative outputs of national private cosmetics companies in Indonesia are the fruits of not only the ideas of the founders or owners but also the organizational learning. Keywords:: knowledge creation, cosmetics industry, organizational learning INTRODUCTION: KNOWLEDGE CREATION MODEL 254 Based on the rapid development of knowledge-based competitive advantage theories, in of 2000, Soo, Midgley, and Devinney (2001) conducted an exploratory study to identify influencing variables of the knowledge creation processes in a company. The study indicated the presence of 11 factors that were considered significant in the process of knowledge creation within a company. Relationship of the eleven factors is described in a model, which is called by Soo, Midgley, and Devinney (2001) a general model of knowledge creation process in companies of four industries where the study was conducted. According to Nonaka and Takeuchi (1995) one of the other indicators of the creation process or knowledge creation in a company is the apparent innovations . Those innovations can be observed from new products created, new product packaging, new production methods, or any positive changes in product quality (Q or quality), production cost (C or cost), speed of product delivery to customers (D or delivery), safety during production (S or safety), as well as eagerness of the employees in conducting their jobs and morale-obligations (M or morale). Therefore, research on company knowledge creation is performed in an industry that has an innovation-based competitive characteristic. The industry that was selected to study object was the cosmetics industry in Indonesia, an industry that was regarded as innovative and was not affected by the economical crisis. Cosmetics Industry in Indonesia Derived from the Indonesia Industry Report and Market Research: Cosmetics Manufacturing in Indonesia published by Digital Information Services, it is known that the cosmetic producer industry in Indonesia has 744 member companies. From that 744 companies, 66,67 percent are characterized as home-industry, while the rest or approximately 180 companies are cosmetic companies that have applied modern approaches (technology, machinery, devices) to its production or it is regarded as a full-industry company. Refering to data of the Indonesia Investment Coordinating Board for 2006, number indicated that there were 91 large-scale cosmetic companies in Indonesia.. However, data of the Directorate of Traditional Medicine, Supplement, and Cosmetic Certification, particularly the Sub-Directorate of Cosmetic showed that of the 91 cosmetic producer companies, which registered their products more than once within the period 1997-2002, ther were 51 companies. From those 51 companies, only 43 companies were willing to be studied. Soo, Midgley, and Devinney (2001) have conducted a study that produced factors or variables that have roles in the knowledge creation process. They studied 317 companies in four industries: finance, health, manufacturing, and the mining industry. Correlation among the factors or variables then was described in a ‗model‘. In their research, Soo, Midgley, and Devinney applied the partial least squares (PLS) statistical approach for data processing (26). Refering to Hox (1995), PLS is definitely is more appropriate for study which explores variables that determine a condition, in a situation where supporting theory is insufficient. Nevertheless, the PLS approach is not suited to be applied for identifying a model that contains correlations among the variables that posses mediated prediction characteristics, because the PLS approach is unable to simultaneously conduct estimation toward a series of multiple regression equations that are separate but interdependent. When significant variables 255 for the knowledge creation process or ―what matters‖ have been found, then it requires a more appropriate approach for a confirmatory study, in order to identify the model of knowledge creation. Therefore, by means of this research, it is desirable to find out what is the structure of the knowledge creation model in a company. It is shown that national private cosmetic companies that develop, produce, and market their cosmetic products in Indonesia are companies that compete based on innovation. At the time when the crisis affected the violently Indonesian economy significantly, the selling performance of cosmetic products was not significantly affected. According to PERKOSMI or the Indonesian Cosmetics Association the average market growth of the cosmetics industry in Indonesia in the period 2000-2005 was 15-20%, and it was predicted to grow above 20% over the next five years. The contribution of cosmetic products to the non oil and gas export value during 2007-2010 is continuing to increase. Also surveys conducted by a leading business magazine in Indonesia, SWA magazine, in cooperation with Frontiers and Markplus Research Institutes indicated that from 1996 until 2006, local cosmetics products were able to become main competitors of well-known cosmetic products of multinational companies. In some sub- preparations of skin care, lip and eye makeup preparations, cosmetic products of national private companies were able to exceed the products of multinational companies. Therefore, it would be appropriate to try to ascertain what is the model of knowledge creation at these Indonesian cosmetic companies, whether the structure of the knowledge creation model in the Indonesian cosmetics industry is identical with the ‗model structure‘ of knowledge creation that was developed by Soo, Midgley, and Devinney (2001)?. II. RESEARCH OBJECTIVES In reference to the main aspect of the study, this research is conducted with its objective to identify, analyse, and give meaning to a model structure of knowledge creation at national private cosmetic companies in Indonesia. Questions asked in the research are : 1. What is the model structure of knowledge creation at large-scale cosmetic companies in Indonesia? 2. Whether the model structure of companies knowledge creation in the Indonesian cosmetic industry are identical with the model structure of knowledge creation that was developed by Soo, Midgley, and Devinney (2000)?. Knowledge Creation Process Soo, Midgley, and Devinney (2001) developed and tested a knowledge creation model in organizations comprised of three aspects: 256 1. First , is knowledge source that afterwards is called input, is part of the knowledge creation process that consists of knowledge and the information acquisition process from the external environment. 2. Second , is knowledge application that is called process, is part of the knowledge creation process that consists of activities that utilize knowledge from the external environment in order to solve problems and make decision. 3. Third, is the result that later is called output, is part of the knowledge creation process that emphasizes the result of knowledge creation in terms of innovations and its impact on the output of the company as a whole. Input in the Knowledge Creation Process As described by Mowery, Oxley, and Silverman (1996), a perspective on knowledge as a basis of competitive advantage emphasizes the importance of obtaining new knowledge through organization-learning . Also knowledge creation is determined by access to information and beneficial knowledge that occurs outside the company. Only utilizing existing knowledge within the company (exploitation), how good the knowledge is, will not be sufficient to give competitive advantage. According to Kaplan, et al. (2001), a company should extend its knowledge boundaries or perform boundary spanning by means of acquiring new knowledge from outside the company (exploration). Another study by Levinthal and March (1993) that also supported by Preiss (1999) indicates that the larger amount of information and knowledge flow into a company, the bigger also the new knowledge (pool of new knowledge) that is created. The essence of the Levinthal and March (1993) study actually concerns the needs of significant knowledge creation activities by a company in order to improve the new knowledge being created. A study conducted by Echeverri-Carroll (1999), showed that explicit and implicit knowledge can be ‗caught‘ by the company through an innovation network that consists of formal and informal networks. The network is formed or being formed as a response to a company‘s need for knowledge. For example, knowledge that is required by a company in particular to produce an innovation in terms of new products, processes, or services. Within research that involves a network in the process of knowledge creation, network terminology is widely used and covers all forms or relationship mechanisms between organizations (Krebs, 2001). In practice, the network consists of formal and informal networks, which the study by Soo, Midgley, and Devinney (2001) is described as follows : 1. Formal collaboration is a formal network that refers to relationships between two or more companies, where the relationship is arranged by a formal agreement. Formal collaboration for example, is a cooperation to develop and market a new product, or conduct a joint project research, or other developments. Forms of formal collaboration can vary, e.g. strategic alliances joint ventures, licensing, and many others. Nevertheless, things need to be considered, daily transactions between customers and the company are not included within this formal collaboration; 2. Informal interactions are an informal network that refers to relationships among people that is not arranged by a formal agreement. This informal network 257 includes informal meetings that are related or indirectly related with the company‘s business activities. Interactions that often called social networking can occur such as social meetings, conferences, seminars, work place meetings or through electronic communication media. The Problem Solving Process and Decision Making in Knowledge Creation As indicated by Kaplan, et al. (2001), knowledge cannot be observed and measured directly, therefore the most logical place to find the presence of knowledge is by means of measuring activities or actions that are undertaken by individuals or companies as a whole. Refering to the studies of Kolb ( Starkey, 1996), the process of problem solving and decision making are utilized as a process to identify the presence of knowledge, or knowledge creation. As mentioned by Nonaka and Takeuchi (1995) and Kolb (Starkey, 1996) knowledge creation is performed in particular when individuals face situations that are not usual (Kolb in Starkey, 1996) or a situation when an irregular action should be taken (Nonaka and Takeuchi, 1995). Later, Von Krogh, Ichiyo, and Nonaka (2000) ndicated that knowledge creation in a company is based on how to manage conversation among individuals within the company. There is a need to be sure the purpose of the conversation is not only to confirm the presence of the knowledge, e.g. between a supervisor and a subordinate, but it is used to solve problems. In case the conversation or interaction between individuals, if it is only proposed to confirm the presence of knowledge, then this is control over routine activities. In an organization-learning cycle, a critical e part of the collective mental model has not been touched (Senge, 1990). Innovation and Knowledge Creation Process Perspective concerning dynamical competence as a basis of competitive advantage as indicated by Teece et al. (1997) who emphasize that knowledge, in particular renewal of knowledge possessed by a company, is a resource of innovation and competitive advantage. While a study of Swan et al. (1999) showed that the faster inflow of knowledge to the company, the bigger also is innovative outputs from the company. Therefore, in their model Soo, Midgley, and Devinney (2001) place innovation as an output of the knowledge creation process. Soo, Midgley, and Devinney (2001) also conducted a test of correlation between a company‘s innovative outputs with its company performance. This hypothetis that was being tested by Soo, Midgley, and Devinney. (2001) is referred to in a study of Banbury and Mitchell (1995, in Soo, Midgley, and Devinney, 2001) this concerns incremental product innovation that seriously influences a market segment of the companies that applied it. A study of Chaney and Devinney (1992, in Soo, Midgley, and Devinney, 2001) concerns company innovative outputs that affect performance in forms of price of stock on a stock exchange, as well as the company‘s profit. 258 Company’s Absorptive Capacity Senker and Senker (1994, in Jones and Craven 2001) confirmed that access of a company to beneficial knowledge is not enough for the company to enable it to create new knowledge. This requires required a systematic way so that the new knowledge can be diffused, to make sure that the newly obtained knowledge from external environment can be communicated and utilized effectively in the company. Therefore, in this research the most important factor in knowledge creation is the is company‘s absorptive capacity. Company absorptive capacity, according to Cohen and Levinthal (1990) refers to capacity of the company to assimilate new knowledge and skills. Along with the study concerning learning in organization, a study by Dussauge et al. (2000, in Jones and Craven, 2001) showed that a company will be easier to obtain new knowledge or competence if they already possess a part of the knowledge or competence. Hamel (1991) also stated that the presence of an overlapping dominant logic in a company with its partner or even its competitor, will make it easier for the company to obtain new knowledge or competence from that partner or competitor. A study of Cohen and Levinthal (1990) reconfirms that in the case of a company possessing knowledge or skill within an area that is correlated with the knowledge or skill of its partner/ competitor, then the company possesses a competence to identify value from new information, ability to assimilate it, as well as to utilize it for commercial purposes (101). In a study conducted by Hamel (1991,in Jones and Craven, 2001) concerning collaboration, it is mentioned that the possibility for learning is greater for those companies that compete with each other because they operate in a similar context and possess dominant logic that overlaps with each other. A study of Dussauge et al. (2000) also showed that companies will be easier to obtain new capabilities if they have competence in similar field. This confirms the study of Cohen and Levinthal (1990), which defines that when companies possessed knowledge or skills in a correlated field, then this will improve company capability to identify the benefits of new knowledge, assimilate, and utilize it for commercial purposes . A study of Cohen and Levinthal (1990) showed that a company with high investment on research and development (R & D) will have a capability to absorb new knowledge and skill. As well as high investment on R & D, other factors that are influential to the absorptive capacity of the company are cumulative experience and a central position within the network. For example, a study that was conducted by Robertson, Scarbrough, and Swan (2000) considered cumulative experience and indicated that the longer a company stays in its industry and the more experience in collaboration it has with other companies, then the higher capability of the company to absorb new knowledge. A study conducted by Tsai (2001) indicated that a central position within a network showed that a working unit in a company can produce more innovation due to absorbing new knowledge better than other working units . A study by Gupta and Govindarajan (2000) also showed that within a multi business network inside a multinational company, then the strategic business unit (SBU) that occupies a central position within the business network is a strategic business unit that is most innovative due to its possessed capability to absorb new knowledge relatively better than other strategic business units. Jones and Craven (2001) also brought forward several organizational factors with general characteristic that are able to bear on the company‘s absorptive capacity such as organizational structure and human resource policy . 259 In addition, a study concerning organization learning by means of strategic alliances such as conducted by Doz and Hamel (1998) supported efforts for comprehending a company‘s absorptive capacity. According to Mowery, Oxley, and Silverman (1996), this strategic alliance can be exploited by the company, not only to gain new knowledge but also to obtain access toward capabilities that are possessed by other companies. In this study to recognize a strategic alliance, the indicator of knowledge absorption is the increase in the overlapping level of technological capabilities between partnering companies, as well as an increase in the similarity of their technology portfolios. According to Mowery, Oxley, and Silverman (1996) companies‘ intention to make strategic alliances is to share the risk of cost and innovation (78). The increase in cost and innovation risks generally takes place in industries that require large amounts of cost for performing innovation, such as pharmacy, telecommunication, and the commercial flight industries. Development cost and risks that get higher or increase, supplemented with a product life cycle that get shorter causes a need toward rapid market penetration and attracts the companies to strategic alliances There is also an alliance that focused on collaboration between new users and vendors as a way to coordinate and formulate technical standards and develop a dominant design. However, in general the purpose of companies to conduct strategic alliances, which is correlated with purposes already indicated is to obtain new information, knowledge, skill, and technology from its partner companies. A strategic alliance has more benefits than a cooperation agreement between organizations because in the perspective of knowledge as a basis for competitive advantage, a companys capability is based on knowledge, mainly implicit knowledge (Doz and Hamel, 1998). Whereas implicit knowledge is very difficult to spread due to its specific characteristics which depend on the context, therefore a partnership contract cannot become a mechanism for new knowledge absorption. According to Mowery, Oxley, and Silverman, 1996) alliance structure is influential to a company‘s opportunities for obtaining new knowledge. The form of strategic alliance that is most effective for organizational learning is an equity joint venture then a joint development agreement. While forms of strategic alliance such as a license agreement is considered less valuable With the joining of a company‘s absorptive capacity factor, hence the complete model structure of knowledge creation is as indicated in Figure 1.. RESEARCH METHOD Variables that have been identified by means of a literature study are (1) formal collaboration, (2) informal interaction, (3) information acquisition, (4) knowledge acquisition, (5) creativity in problem solving and decision making, (6) completion in problem solving and decision making activities, (7) consensus in problem solving and decision making activities, (8) new knowledge, (9) innovation in company, (10) company absorptive capacity, and (11) individual absorptive capacity. While, correlation between variables have been described in Figure 1. Research Hypothesis In this research, there are 27 hypotheses that will be tested, viz.: A. Collaboration and interaction activities with information and knowledge acquisition: 1. There is positive correlation between formal collaboration with information acquisition; 2. There is positive correlation between formal collaboration with knowledge acquisition; 260 3. There is positive correlation between informal interaction activities with information acquisition; 4. There is positive correlation between informal interaction activities with knowledge acquisition; 5. There is positive correlation between information acquisition and knowledge acquisition; 261 FIGURE 1: THE COMPLETE MODEL STRUCTURE OF KNOWLEDGE CREATION INFORMATION ACQUISITION KNOWLEDGE ACQUISITION COMPLETION CREATIVITY NEW KNOWLEDGE INNOVATION INDIVIDUAL ABSORPTIVE CAPACITY ORGANIZATIONAL ABSORPTIVE CAPACITY FORMAL COLLABORATION INFORMAL INTERACTION CONSENSUS 262 B. Problem solving and decision making activities with information and knowledge acquisition: 6. There is positive correlation between information acquisition with level of level of completion in problem soling and decision making activities; 7. There is positive correlation between information acquisition with level of creativity in problem solving and decision making activities; 8. There is positive correlation between information acquisition with level of consensus in problem solving and decision making activities; 9. There is positive correlation between knowledge acquisition with level of completion in problem solving and decision making activities; 10. There is positive correlation between knowledge acquisition with level of creativity in problem solving and decision making activities; 11. There is positive correlation between knowledge acquisition with level of consensus in problem solving and decision making activities; C. Problem solving and decision making activities with creation of new knowledge: 12. There is positive correlation between level of completion with level of creativity in problem solving and decision making activities; 13. There is positive correlation between level of consensus with level of creativity in problem solving and decision making activities; 14. There is positive correlation between level of completion in problem solving and decision making activities with new knowledge creation; 15. There is positive correlation between level of creativity in problem solving and decision making activities with new knowledge creation; 16. There is positive correlation between level of consensus in problem solving and decision making activities with new knowledge creation; D. New knowledge creation with innovation in the company: 17. There is positive correlation between new knowledge that is created with performance of company innovation; E. Absorptive capacity with information and knowledge acquisition: 18. There is positive correlation between individual absorptive capacity with information acquisition; 19. There is positive correlation between individual absorptive capacity with knowledge acquisition; 20. There is positive correlation between organization absorptive capacity with information acquisition; 21. There is positive correlation between organization absorptive capacity with knowledge acquisition; F. Absorptive capacity with problem solving and decision making activities: 263 22. There is positive correlation between individual absorptive capacity with level of completion in problem solving and decision making activities; 23. There is positive correlation between individual absorptive capacity with level of creativity in problem solving and decision making activities; 24. There is positive correlation between individual absorptive capacity with level of consensus in problem solving and decision making activities; 25. There is positive correlation between organization absorptive capacity with level of completion in problem solving and decision making activities; 26. There is positive correlation between organization absorptive capacity with level of creativity in problem solving and decision making activities; 27. There is positive correlation between organization absorptive capacity with level of consensus in problem solving and decision making activities; Population and Sampling Target In this research, the sample to be analysed is a group of national private companies that manufacture cosmetic products. These companies develop, produce, and sell their products, unlicensed and utilize modern systems or technology (full-industry). This research does not cover companies with foreign-investment status because of who makesdecisions concerning (1) innovation in product field, (2) production process, as well as (3) management is at the authority of the parent company. This research also does not cover small and medium sized companies. Sampling design in this research is stratified random sampling for the reason of limited time and to assure the representation of each group/ sub population. The sample is persons who are responsible for decision making concerning innovative outputs at the organization level. Therefore, the sample is:: - Managing Director or Chief Executive Officer (CEO) that is the highest leader in a company; - Member of upper management group below Managing Director or CEO (Director, Division Manager, General Manager, and other that equal); - Member of functional level management group (marketing manager, production manager, research and innovation/development manager, human resource manager, financial manager, information system manager, and other that equal). Statistical Analysis Data was collected by means of a questionnaire and interviews. The results are tabulated, calculated, and analysed. Several statistical techniques are used to analyse the data, while LISREL (LInear Structural RElations) version 8.53 software is used. This is different from the research conducted by Soo, Midgley and Devinney (2000, 2002), model as this study in this research is not investigated using partial least square (PLS) approach, but instead uses Structural Equation Modeling (SEM). SEM is selected as an analytical tool in this research because of its two advantages of SEM compared to other multivariate approaches, these are: 264 1. SEM is capable of simultaneously making estimations of a series of multiple regression equations that are separate but interdependent. 2. SEM is capable to handle latent variables; therefore, it requires manifest variables or indicators that are able to visualize the latent variables. IV. MODEL FITNESS TEST According to the Maruyama model of fitness test (model specification; model fitting) it is an evaluation of difference between matrices variance/covariance that is predicted by a model, with variance/covariance matrices from samples or actual data . The difference of the two matrices is called with fit or ‗goodness of fit‘ (GOF). Thus, if the hypothesized model is close to the actual data, it can be said that the model possesses a high fitness degree or almost fit. As explained by Schumacker and Lomax, to avoid problems in identifying or testing the model of fitness, a researcher should start the model testing from the most simple form or parts of the model. Also, added by Maruyama is that by ‗starting small and simple‘ then the researcher can identify which relation or what part of the model is is become source of problems Therefore, in this research tests are performed sequentially at MODEL II that is the original model of Soo, Midgley, and Devinney (2001) which is most simple, followed by MODEL III that adds the complexity of MODEL I with the presence of additional correlations between latent variables. Subsequently, at MODEL IV, model complexity is increaswd by means of the permission of covariance occurrence between latent variables not dependent or exogenous variables. Finally, MODEL 1 is tested as the hypothesized model and as the most complex model. Model developing and testing also considers a modification index that is given by LISREL 8.53. Table 1 provides a comparison of GOF size from the four models. TABLE 1: GOODNESS OF FIT NO MEASURES Criteria Model II Model III Model IV Model I ABSOLUTE FIT/MODEL FIT 1. _ 2 df: 3712 t non significant df: 3707 t non significant df: 3705 t non significant df: 3700 t non significant 2. GFI 0 = no fit 1 = perfect fit (1) 0.858 0.88 0.92 0.808 3. RMR or RMSR The closer RMR is to 0, the better the model fit. The smaller the SRMR, the better the model fit. SRMR = 0 indicates perfect fit (2) 0.0452 0.021 0.012 0.0655 265 Table 1 continued. 4. RMSEA < 0.05 (3) 0.0414 0.044 0.017 0.087 INCREMENTAL FIT 5. AGFI AGFI > 1.0 is associated with just-identified models and models with almost perfect fit. AGFI < 0 is associated with models with extremely poor fit, or based on small sample size. AGFI should also be at least .90. (1) 0.817 0.859 0.899 0.806 6. NFI NFI values above .95 are good, between .90 and .95 acceptable, and below .90 indicates a need to respecify the model. ( 4) 0.856 0.88 0.898 0.801 PARSIMONIOUS FIT 7. PGFI Higher, better (5 ) 0.38 0.29 0.489 0.495 8. PNFI Higher, better (6) 0.53 0.35 0.611 0.613 Notes: (1) Baldwin (1989) and Bentler & Bonnet (1980); (2) Schumacker & Lomax (1996: 126) (3) Steiger (1990) (4) Bentler & Bonnet (1980); (5) James, Mulaik, and Brett (1982) (6) Mulaik, James, and Brett (1989) From Table 1, it can be observed that the four models sufficiently meet the criteria of fitness of each group. As described by Hair et al. to compare more than one model, one should consider relative size value of one model to another In the case when all models show good fitness, then Hair et al give four criteria to select model that its: 1. _ 2 not significant (at least p>0.05 or 0.10 or 0.20) : MODEL I, II, III, IV are qualified; 2. Size of incremental fit : NFI >0.9 : MODEL IV is the closest; 3. Size of absolute fit RMR/RMSR and RMSEA relatively low : MODEL IV is the lowest; 4. Size of parsimony fit model that is being hypothesized is more ‗parsimonious‘ or relatively higher compared to other models : MODEL I and IV with a degree of freedom MODEL IV is higher than the degree of freedom MODEL I. The testing result showed that from the series of tests thatto be sure that MODEL I as the hypothesized model encounters as the lowest fitness level, while the model with the highest 266 fitness level is MODEL IV )Figure 2. Referring to the explanation in the beginning of this chapter, the selected model should be a plausible model with sufficient theoretical support. Because the four models possess sufficient theoretical support, therefore MODEL IV is chosen as the closest to the actual model. In other words MODEL IV describes correlation between determining factors in new knowledge creation that provide innovation to large- scale cosmetic companies in Indonesia. Consequently, this research is shows that the model structure of knowledge creation in the cosmetics producers and sellers in Indonesia is different from the knowledge creation model that was developed by Soo, Midgley, and Devinney (2000). In relation with the proposed hypotheses, 22 of 27 hypotheses are proven. There are five possibilities of causes why the confirmed model in this research is different from the model of Soo, Midgley, and Devinney (2000). Possibilities of the cause are entirely derived from differences of data sources, methods of data acquisition, and analytical tools or data processing. First, the study conducted by Soo Midgley, and Devinney (2000) is an explorative study. The purpose of the study is to find variables that have a significant role in the knowledge creation process that take place in a company. While this study is more confirmatory, where the confirmed model consists of identified variables in the previous study, for example study by Soo, Midgley, and Devinney (2000). Different study purposes may cause differences in the analytical tools used. Second, because of purpose of the study is relatively different, therefore the analytical tool being used is different. Soo, Midgley, and Devinney (2000) used Partial Least Squares or the PLS analytical tools to process the data, while this study utilizes Structural Equation Modelling or SEM. Though both are categorized as complex multivariate statistical analysis, however, as explained by Hox, PLS is more appropriate for a study that is objective to explore variables in a situation where supporting theory is insufficient, while SEM is more appropriate to be utilized for a confirmatory study, where variables have been identified and supported by sufficient theory (14). In SEM, the structural coefficient can be analogized with path coefficient that visualizes total effect between a direct effect and an indirect effect of one variable to another. While, in PLS, because the characteristic is to overview partial correlation, therefore that is the direct effect. Third, the study by Soo, Midgley, and Devinney (2000) was conducted on 317 companies that operate in manufacturing and the service field of four Industries. This study is focused on the Indonesian cosmetics industry only, an interesting industry in Indonesia because the companies in that industry compete tightly, has innovation-based competition, and is not too impacted by the economical crisis.. With a high consumer bidding capacity, low supplier bidding capacity, low product substitution level, only average impact from overseas products,, and the level of local competition is high, that is s why the attractiveness of the cosmetics industry in Indonesia can be said to be middle-high. 267 FIGURE 2: MODEL IV INFORMATION ACQUISITION KNOWLEDGE ACQUISITION COMPLETION CREATIVITY NEW KNOWLEDGE INNOVATION INDIVIDUAL ABSORPTIVE CAPACITY ORGANIZATIONAL ABSORPTIVE CAPACITY FORMAL COLLABORATION INFORMAL INTERACTION CONSENSUS Similar with the study of Soo, Midgley, and Devinney (2001) Findings of this study 268 Porter (1985) said that each industry is unique and also possesses a unique structure . He also stated that industry attractiveness indicates industry profitability, where the industry profitability is a function of a balance between supply and demand, while the balance between supply and demand is determined by the industry structure. . Soo, Midgley, and Devinney (2001) did not give any detailed explanation concerning structure or characteristic of the banking, health, manufacturing, and mining industries in Australia from which the data was taken, also did not explain specifically the similarity or difference among those four industries. However, data from various industrial sites in Australia shows that the banking industry in Australia during the period 1998 to 2000 – the period of data acquisition by them– is perceived as a very attractive industry. This is different from the manufacturing and mining industries that are perceived as low attractive industries. While health industry was relatively stable during 1990-2000 and is an industry with a middle attractiveness level. Hence, there is nothing that specifically can be identified among the four industries where Soo, Midgley, and Devinney (2000) acquired the data to compare them directly with the cosmetics industry in Indonesia. Fourth, distribution of the questionnaire and in-depth interviews in the study of Soo, Midgley, and Devinney (2000) is conducted with the head of 317 companies (CEOs or member of the upper management team) where each one represents a company, while this current study is more comprehensive because it is being conducted on the three level of management, those are CEOs, teams of upper management level, and teams of middle management or functional level. This respondent group is identifying those who were responsible for decisions concerning innovation on organization or company level. Later discussion is conducted using difference tests of the three respondents to observe specifically if there is any perspective difference among each group. However, because of the small number of samples it does not qualify to utilize LISREL, therefore, it cannot be seen whether there is any difference of knowledge creation model among the three groups. Nevertheless, various studies have showed that there are difference perspectives between executives from different levels of management, in decision making in certain fields. Therefore, differences of position level variation of the respondents might influence differences between model structure of Soo, Midgley, and Devinney (2000) with this current study. Fifth, there is a different instrument that was used in the study conducted by Soo, Midgley, and Devinney (2001) and this study, in particular on the instrument that records responses of respondents on problem-solving and decision-making. In a further study, Soo, Midgley, and Devinney (2002) explained that the instrument from Berkelloway (1978) that was used in the former study consisted of more indicators than the instrument referred to by Eisendhart (1998) and Ginsberg (1994). However, those indicators are actually less capable to explain latent variables consisting within the model. 269 SIGNIFICANCE OF THE RESEARCH RESULT Priority Level of Information and Knowledge Sources This study indicates cosmetic companies in Indonesia manage information and knowledge acquisition directly from 13 parties with a level of frequency rank of seven parties as follows: (1) distributor, (2) research service organization, (3) supplier, (4) partner company, (5) education and training provider organization, (6) advertising and promotion service organization, and (7) customer or cosmetic user (end-user). Mode Alternatives of Information and knowledge acquisition This research indicates that: - knowledge acquisition activity should be initiated first by an information acquisition activity, - formal collaboration is the most frequently applied form of activities of a company to manage information acquisition than informal interaction, and - both information and knowledge acquisition activities are affected by individual and organization absorptive capacity. Therefore, for information and knowledge acquisition of a , large scale cosmetic company in Indonesia prefers activities that are undertaken by a formal agreement. Individual and Organization Absorptive Capacity 270 This research indicates that individual and organization absorptive capacity is affected by both information and knowledge acquisition activities However, as indicated,, in large scale cosmetic companies in Indonesia, individual absorptive capacity has a greater role than organization absorptive capacity. It means, executive and employees actively seek, note and record information, take action based on information, share information, participate actively in sharing at meetings, and actively improves knowledge by means of formal efforts such as education and training, or by self-study. Role of Problem Solving and Decision Making Activities This research indicates that completeness, creativity, and, consensus factors in problem solving and decision making activities, are affected by knowledge acquisition activity, individual absorptive capacity, and organization absorptive capacity. This research also indicates that the creativity factor in problem solving and decision making activities are affected by completeness and consensus factors. Innovation and New Knowledge Creation The research indicates that projects concerning new products and new methods for managing something are two things that are the most frequently found in a company. Ideas or projects concerning new products can include both new raw material and concept of new products. 271 While new methods to manage something include machines operation in producing products and methods for improving employee motivation. For innovation, the most frequently found indicators by the respondents are commercial benefits that are gained from new products. Centralized new knowledge in the context of new products and methods can be connected with the effort to obtain information and knowledge acquisition that is managed by the company, which also range only in the context of product, method, and market. The company gets information and knowledge in general ranging between product and market. This research is focused on the product development and method for product production. Strategic alliance with various partners are mostly product-link in nature. While, alliances of knowledge-link in nature is also intended to improve competences in terms of development, production and product marketing. From in-depth interviews, development of marketing strategy as well as the development of competence-based human resource management are two groups of knowledge that indirectly relate to the product, but are more related to management knowledge. Network Pattern of Cosmetic industry Knowledge Creation Dundon explained that one of the applied innovation patterns for companies in the toiletries business is the pattern of: distribution network that strong and spread- recognized product - new product It means, to produce innovation in forms of new products, companies in the toiletries business started with developing distribution networks that are strong and spread, which are used to distribute a company‘s products that has been recognized in the community/ customers. Later by means of information and knowledge concerning custoumers that are being collected through its distribution network management, company is producing new product. These new products can be delivered soon to the customer due to support of the distribution network. This pattern seems appropriate to a company in Indonesia, in particular a company that operates in the toiletries industry, cosmetics, as well as consumer products . CONTRIBUTION TO THE BUSINESS PRACTICE 272 In the early part of this study, what is the contribution that can be provided by the research concerning knowledge creation To develop its competition strategy, what are the factors that should be closely considered by cosmetic companies in Indonesia?. Figure 3 indicated factors that should be noticed by the decision makers in national private cosmetic companes in Indonesia in order to be able produce innovative outputs. However, in order to be more specific in this research contribution it can be explained by means of theory and concepts concerning the learning organization and knowledge management. In his book that entitled is Learning in Action (2000), David Garvin gave a definition concerning learning organization as the following: A learning organization is an organization skilled at creating, acquiring, interpreting, transferring, and retaining knowledge, and at purposefully modifying its behaviour to reflect new knowledge and insight. From the above definition, it is known that modification of company behaviour that is shown among others by new product innovation, new technology (process), development of new markets, or a combination of both, are reflections of the new knowledge presence. The new knowledge can be obtained as the company is trained in terms of creation, acquisition, signification, transferring, and preserving knowledge. Where, creation, acquisition, signification, transferring, and preserving knowledge activities basically is essential activities in knowledge management. Therefore, there are three main activities that need to be managed well by the company. First is knowledge acqusition activity. Figure 4 indicates that before manage a knowledge acquisition; a company need to determine what knowledge that required by its acquisition with considering its vision and business strategy. FIGURE 3: FACTORS THAT FREQUENTLY FOUND IN A COMPANY 273 INFORMATION ACQUISITION KNOWLEDGE ACQUISITION COMPLETENESS CREATIVITY NEW KNOWLEDGE INNOVATION INDIVIDUAL ABSORPTIVE CAPACITY ORGANIZATION ABSORPTIVE CAPACITY FORMAL COLLABORATION INFORMAL INTERACTION CONSENSUS New knowledge in the field of product and method to perform something Openness of executives to accept new and innovative idea Mainly with parties: - Distributor - Supplier - Advertising Company - Research Company - Partner Company Practice to seek and utilize information for performing task Company support for - Maintain to improve knowledge and skill - Seek for information that required to performing task Work pattern that caused problem solving and decision making activities are managed by parties with various backgrounds Work pattern that caused problem solving and decision making activities are managed in the harmonious atmosphere and there is mutual commitment to achieve objectives Commercial benefit of innovative application in forms of product and market 274 FIGURE 4: ADVICE FOR NATIONAL PRIVATE COSMETIC COMPANY TO MANAGE AN IDENTIFICATION OF PRIORITY KNOWLEDGE After required knowledge is identified, the company needs to consider main source of the knowledge as well as modus or alternative method for its acquisition. On knowledge acquisition activity, it is very important for the company to consider its absorptive capacity and individual absorptive capacity-of individual that conduct acquisition. This knowledge creation research support study of Collins (2000) underlined that to improve effectiveness of knowledge acquisition, both company‘s employee and executive that managing knowledge acquisition activity: - must recognize the objective of knowledge acquisition activity (why is need for acquisition?; what is function of the knowledge?), - must possess sufficient knowledge to manage acquisition of new knowledge, - must has opportunity to manage knowledge acquisition, - must has perspective that that knowledge acquisition activity is essential Second is knowledge sharing and distribution. Three important things here are (1) the presence of task forces, (2) the presence of practices that supported by company policy, as well as (3) the presence of information and communication technology infrastructures (ICT) that make easier knowledge sharing and distribution activities. Practices of problem solving and decision making in general have been routinely run within cosmetic company is necessary to be preserved. Similarly, company‘s support on activities that is able to improve Analysis of external factors in KNOWLEDGE ECONOMY Development of Business Objectives and Strategies Development of Objectives and KNOWLEDGE MANAGEMENT Strategy - Knowledge acquisition - Knowledge sharing and distribution - Knowledge utilization Priority Knowledge Knowledge Identification - Innovative knowledge (strategic; innovative) - Advance knowledge (advanced) - Basic knowledge (basic) 275 organization absorptive capacity such as internal training and inter department organization policies such as implementation of total quality management, ISO principles, CPOB principles or GMF. The last is knowledge utilization activity. After knowledge being acquired and distributed, later on the important activity is utilization of the knowledge so that new knowledge being produced that will award innovation. Knowledge utilization activity particularly occurred within problem solver and decision maker groups (Probst, Raub, and Romhardt, 2000). Research showed there are five important matters that need to be considered by the company: 1. There are practices for problem solving and decision making within group with various background; 2. Trained group for managing problem solving and decision making activities; 3. Problem solving and decision making activities are managed in a harmonious atmosphere; 4. The executives show openness attitude for accepting new ideas, and 5. The executives become example in terms of commitment for the implementation of the agreed decision. In addition, from this research it is known that national private cosmetics companies in Indonesia mostly obtained commercial benefit from its innovative output in terms of new product and market. This is in concurrence with the invented new knowledge, which is new knowledge in the field of products and the method to perform something. Analysis of the global cosmetics industry showed that in its early development, global cosmetic companies also were those who obtained commercial benefits of its product and market innovations. However, in their life path, global cosmetic companies such as P & G, L‘Oreal, Estee Lauder and Unilever obtained significant commercial benefit from their innovation in the field of management and technology. Observing this pattern, hence apart from the capital that needs to be invested, cosmetic companies in Indonesia must develop capability for producing management and technology innovations as both type of innovations will cause improvement in a company‘s competence for producing product innovation. Need also to be taken that currently cosmetic companies in Indonesia irely on distributor and suppliers more than their effort on research for the importance of information and knowledge acquisition. This is different with the practice of global cosmetic companies that rely on research. Apart from their business strategies, global cosmetic companes put research and innovation as centralized activities only in several locations. Because global cosmetic companies have broader geographical scope than local cosmetic companies, hence the companies tend to apply product-out concepts to its market, not market-in. However, this concept has succeeded because global cosmetics companies possess prior knowledge as an accumulation result of their learning. 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Enabling Knowledge Creation : How to unlock the Mystery of Tacit Knowledge and Release bthe Power of Innovation, Oxford University Press. 279 THE IMPACT OF FISCAL AND MONETARY POLICY ON INDUSTRY AND INDONESIAN ECONOMY: A COMPUTABLE GENERAL EQUILIBRIUM ANALYSIS Rina Oktaviani, Tony Irawan, and Lukytawati Anggraeni 1 Department of Economics, Faculty of Economic and Management, Bogor Agricultural University
[email protected] ABSTRACT Manufacturing Industry has important role in Indonesian economy in terms of its contribution to national output and employment. However, it is very fragile from internal and external shock. Thus, government intervention is substantially needed to offset the negative impact that might be occurred due to internal and external shocks. In this paper we will analyze the impact of both government fiscal policy and central bank monetary policy on industry and Indonesian economic performance by using the Computable General Equilibrium (CGE) model. Fiscal and monetary policy will have a positive impact on Indonesian macroeconomic performance in terms of change in real GDP, investment, consumption, and capital rate of return, with the biggest impact of fiscal policy. However, the result is expected to vary at the sector level and Indonesian industry is not so responsive to changes in interest rates that represent monetary policy. Keywords: industry, fiscal policy, monetary policy 1 The authors are Lecturers the Economics Department, Faculty of Economics and Management, Bogor Agricutural University. The assistance of Heri A Firdaus is highly appreciated 280 INTRODUCTION Manufacturing industry makes a large contribution to Indonesian national output which is measured by the Gross Domestic Product (GDP). Figure 1 suggests that the contribution of manufacturing industry in the period of 2004-2009 was always the largest relative to other sectors with a range of between 26 to 28 percent of total GDP. The second largest was the agricultural sector which contributed nearly half of the industry contribution. FIGURE 1, CONTRIBUTION OF NINE SECTORS TO NATIONAL OUTPUT Note: * interim data Source: Central Bureau of Statistic (BPS) The contribution of industry to Indonesian national output had fluctuated during the period of 2004-2009. It always dropped in odd years. The reason is not due to a cyclical problem but in 2005, 2007 and 2009 external and internal shocks on Indonesian industry occurred. The Indonesian government increased the oil price by 126% in October 2005 and in March, June and November 2007, the government increased the oil price for industrial uses in order to adjust to the international oil price. Meanwhile in 2009, Indonesian industry suffered from the global economic recession which affected Indonesian exports of manufacturing 281 commodities. These conditions created an external shock to Indonesian industry and caused a negative impact to manufacturing output. These simply meant that Indonesian industry is still fragile to external shocks. There are many literature that analyzes the fragility of Indonesian industry or the manufacturing sector to external and internal shocks. Al-Amin (2008) analyzes the impact of external shocks and vulnerability to the Malaysian economy focusing on the manufacturing sector. By using the CGE Model, it is shown that manufacturing is very sensitive to external shocks which is represented by an import price shock. Another report by Cui and Syed (2007) suggested that Chinese industry currently is more exposed to external fluctuations since the shifting of China‘s production structure. Guidi (2009) investigates the impact of changes in oil prices on the United Kingdom‘s manufacturing sector. By using variance decomposition in the Vector Autoregressive (VAR) model, the study suggests that changes in oil prices (external shock) are quite important to determine fluctuations in the UK‘s manufacturing output. These three empirical findings suggest that external shocks do have impact on the manufacturing sector both in developing and in developed countries. The Indonesian government is very concerned with the fragility of the manufacturing sector. Theoretically, if industry is the most important sector in the economy and there is a significant decrease in industrial output, national output will also drop. These will create a threat for the overall economy. Thus, the government should intervene through its policies in order to boost industrial output. The Centre for Development and Integration (2006) suggests that an external shock that is represented by trade liberalization of Vietnam‘s garment and footwear industry should be responded to by extensive government support. In order to minimize the possible negative impact of the global economic crisis, the Indonesian government implemented some fiscal stimulus. The aim of the stimulus was to support domestic industry facing the threat of the global crisis. Some of the policies were reduction of corporate tax from 30 percent to 28 percent, reduction of individual income tax from 35 percent to 30 percent and reducing the electricity price for industry. Moreover, the Central Bank of Indonesia also supported government policies by lowering the interest rate in 282 order to reduce corporate obligations based on interest rate payments and give incentives to expand their businesses. In this study, we analyze the impact of both fiscal and monetary policies on Indonesian industry and Indonesian macroeconomic performance. The study employs a Computable General Equilibrium (CGE) to simulate both fiscal and monetary policies options. The details of the CGE model is presented in Section II. Section III presents results and discussion. Finally, conclusions are drawn in Section IV. CGE MODEL This study uses an updated version of the Wayang general equilibrium model of the Indonesian economy (Warr et al. 1998; Wittwer 1999; Warr 2005). The model is subsequently described as Wayang 2005 and is based on the 2005 Indonesian Input-output Tables (IO) and the 2005 Social Accounting Matrix (SAM) published by the Indonesian Central Bureau of Statistics. It identifies ten different types of households, representing ten socio-economic groups as defined in the 2005 SAM. As well as disaggregating households, it also has a disaggregated industry and commodity structure, with 52 production sectors. The mapped sectors are focused on manufacturing industries, particularly the ―priority‖ industries for Indonesia. The microeconomic behaviour assumed within it is competitive profit maximisation on the part of all firms and competitive utility maximisation on the part of consumers. In the simulations reported in this paper, the markets for final outputs, intermediate goods and factors of production are all assumed to clear at prices that are determined endogenously within the model. Variations to this assumption are possible. For example, the possibility of unemployment can be introduced by varying the closure to make either real or nominal wages exogenous, thereby allowing the level of employment to be endogenously determined by demand. The nominal exchange rate between the rupiah and the US dollar can be thought of as being fixed exogenously. The role within the model of the exogenous nominal exchange rate is to determine, along with international prices, the nominal domestic price level. Given that prices adjust flexibly to clear markets, a 1 percent increase in the rupiah/dollar exchange rate will result in a 1 percent 283 increase in all nominal domestic prices, leaving all real variables unchanged. In this case, the nominal exchange rate (rupiah/dollar) is a numerary price in the model. THEORETICAL STRUCTURE OF THE MODEL The structure of the model itself is relatively conventional. The CGE model in this study belongs to the class of general equilibrium models that are linear in proportional changes and shares many structural features with the highly influential ORANI general equilibrium model of the Australian economy (Dixon, et al. 1982), with numerous adaptation and modification to reflect the realities of the Indonesian economy. The analytical structure includes the following major components: - Household consumption demands, of each of the 10 broad household types, for 52 categories of consumer goods are derived from the linear expenditure system. - The household supplies of labor that are assumed to be exogenous. - A factor demand system, based on the assumption of CES production technology that relates the demand for each primary factor to industry outputs and prices of each of the primary factors. This reflects the assumption that factors of production may be substituted for one another in ways that depend on factor prices and on the elasticity of substitution between the factors. - A distinction between skilled and unskilled labor, which are ‗nested‘ within the sectoral production functions. In each non-agricultural sector, skilled and unskilled labor enter a CES production function to produce ‗effective labor‘. Effective labor, variable capital and fixed capital then enter the production functions for domestic output. - Leontief assumptions are made for the demand for intermediate goods. Each intermediate good in each sector is assumed to be demanded in fixed proportion to the gross output of the sector. - Demands for imported and domestically produced versions of each good, incorporating Armington elasticity of substitution between the two. - A set of equations determining the incomes of the 10 household types from their (exogenous) ownership of factors of production, the (endogenous) rates of return to these factors, and any net transfers from elsewhere in the system. 284 - Rates of import tariffs and excise taxes across commodities, rates of business taxes, value added taxes and corporate income taxes across industries, and rates of personal income taxes across household types which reflect the structure of the Indonesian tax system, using data from the Indonesian Ministry of Finance. - A set of macroeconomic identities which ensures that standard macroeconomic accounting conventions are observed. EMPIRICAL FEATURES OF THE MODEL Industries The national model contains 52 producer goods and services produced by 52 corresponding industries - 5 agricultural and mining industries, 36 classifications of manufacturing industries, 11 utilities and service industries. Each industry produces a single output, so the set of commodities coincides with the set of industries. Commodities Wayang 2005 contains two types of commodities - producer goods and consumer goods. Producer goods come from two sources: domestically-produced and imported. All 52 producer goods are in principle capable of being imported. Factors of production The mobility of factors of production is a critical feature of any general equilibrium system. 'Mobility' is used here to mean mobility across economic activities (industries), rather than geographical mobility. The greater the factor mobility that is built into the model, the greater is the economy's simulated capacity to respond to changes in the economic environment. It is clearly essential that assumptions about the mobility of factors of production be consistent with the length of run that the model is intended to represent. Four types of labor are identified: farmers, operators, administrator and professional. All four types of labor are assumed to be fully mobile across all sectors. The four types are partially substitutable for one another but the proportions in which they are employed in the various sectors vary greatly. These assumptions imply that for each of the four categories of labor 285 wages must be equal in all sectors, though wages for the four types of labour will differ and need not move together. In every sector, it is assumed that there is constant elasticity of substitution (CES) production technology with diminishing returns to scale to variable factors alone. However, we introduce a sector specific fixed factor in every sector to assure that there are constant returns to scale in production to all factors. We refer to the set of specific factors in the agricultural sectors as ‗land‘, and to the set of those in the non-agricultural sectors as ‗fixed capital‘. The assumption of constant returns means that all factor demand functions are homogeneous of degree one in output. In each sector, there is a zero profit condition, which equates the price of output to the minimum unit cost of production. This condition can be thought of determining the price of the fixed factor in that sector. Length of run The model can be operated in the short-run. In the short-run model there are two kinds of mobile capital - one that is mobile among agricultural sectors, and another that is mobile among non-agricultural industries. It is assumed that mobile agricultural capital cannot be used outside agriculture and mobile non-agricultural capital cannot be used in agriculture. In this treatment, agricultural capital is thought of as machinery such as tractors of various kinds, which can be used in a variety of agricultural activities. Non-agricultural mobile capital is thought of as industrial machinery and buildings. Households The model contains ten major household categories - seven rural and three urban - differentiated by socio-economic group, as identified in the 2005 SAM. The sources of income of each of these household types depend on their ownership of factors of production and are estimated from the household income and expenditure survey called SUSENAS. The households are described as follows: 1. Agricultural employees- Agricultural workers who do not own land. 2. Small farmers - Agricultural workers with land < 0.5 ha. 3. Medium farmers - Agricultural workers with land 0.5 ~ 1 ha. 4. Large farmers - Agricultural workers with land >1 ha. 286 5. Rural low income - non-agricultural households, consisting of small retail store owners, small entrepreneurs, small personal service providers, and clerical and manual workers in rural areas. 6. Rural non-labor households, consisting of non-labor force and unclassified households in rural areas. 7. Rural high-income - non-agricultural households consisting of managers technicians, professionals, military officers, teachers, large income entrepreneurs, large income retail store owners, large income personal service providers, and skilled clerical workers in rural areas. 8. Urban low-income households, consisting of small income retail store owners, small income entrepreneurs, small income personal service providers, and clerical and manual workers in urban areas. 9. Urban non-labor households, consisting of non-labor force and unclassified households in urban areas. 10. Urban high income households, consisting of managers, technicians, professionals, military officers, teachers, large income entrepreneurs, large income personal service providers, and skilled clerical workers in urban areas POLICY SIMULATIONS In response to the global economic crisis in 2009, the Indonesian government introduced some policies to strengthen the structure of industry in Indonesia. The government cut income tax for corporations and individuals by 6.67 percent and 3.37 percent respectively. Moreover, the government also reduced the electricity price for industry by 3 percent. These government interventions are also supported by the Central Bank of Indonesia by lowering the interest rate as much as 300 basic points. It is expected that all of these policies would be enough to minimize the impact of the global economic crisis on Indonesian industry. In order to measure the possible impact of such stimulus policies both fiscal and monetary policies, we introduce three scenarios/simulations on the CGE model. Those scenarios are reduction of the interest rate by 3 percent (SIM 1), reducing income tax for corporations and individuals by 6.67 287 percent and 3.37 percent respectively (SIM 2), and an electricity price discount for the industry sector by 5 percent (SIM 3). Short-run closure The current account deficit is assumed to be endogenous, meaning that its size can change with the impact of the shocks. The short run thus depicts a period short enough that imbalances in the external account of Indonesia can occur without the necessity of adjustments aimed at eliminating them. Corresponding capital inflows or outflows are implied by this assumption. If there is an increased current account deficit, for example, there must be an increased capital inflow in the form of the debt instruments needed to finance the external deficit. The treatment of the capital stock and the stock of land are as described under ‗length of run‘. Each of the four categories of labor is mobile among all industries but the total stock of labor is exogenously fixed. Government expenditure is exogenously determined. RESULTS AND DISCUSSION In general, Table 1 shows that all simulations are expected to improve Indonesian macroeconomic performance. National output, average capital rental, real wages, investment and consumption are expected to increase. Even though nominal Gross Domestic Product (GDP) is expected to be negatively affected by the reduction of electricity price (SIM 3), but in terms of real GDP, SIM 3 has a positive impact. The negative impact on nominal GDP is caused by a negative Consumer Price Index (CPI). Electricity price discount is expected to decrease CPI by a very small magnitude. TABLE 1. THE IMPACT ON MACROECONOMIC INDICATORS Description SIM 1 SIM 2 SIM 3 GDP price index, expenditure side 0.3678 4.2312 -0.0002 Average capital rental 0.3942 8.0317 0.0004 Average real wage of administration labor 0.4913 7.7621 0.2478 Average real wage of farmer labor -0.1498 5.5410 0.1665 288 Average real wage of operator labor -0.0982 7.2679 0.1261 Average real wage of professional labor 0.1907 8.7141 0.2775 Consumer price index 0.2144 3.5412 -0.0227 Aggregate payments to land 0.0589 9.0242 0.1437 Real GDP from expenditure side 0.0323 1.3334 0.1102 Import volume index, duty-paid weights 0.5094 12.508 0.0667 Aggregate real investment expenditure 1.3734 6.9826 0.1162 Real household consumption 0.0810 5.6204 0.1099 Export volume index -0.6507 -2.8218 0.0676 Note: SIM 1 : interest rate reduction by 3 percent SIM 2 : Corporate tax rate and Individual income tax reduction by 6.67 percent and 3.37 percent respectively SIM 3 : electricity price discount for industry sector by 5 percent In terms of magnitude, reduction of the corporate tax rate and individual income tax will have a larger positive impact than other simulations. By introducing a tax reduction policy, real GDP will grow by 1.33 percent which is much larger than SIM 1 by 0.03 percent and SIM 3 by 0.11 percent. The result is relevant since tax is one of the biggest burdens for corporations and households. If the government decreases the tax rate, household real wage for all categories of factors will rise higher than inflation (CPI). These conditions will make households have greater purchasing power and so will increase their real consumption. Moreover, a lower tax rate will also improve the investment climate which will increase imports and reduce exports. Thus, net exports will be negatively affected but the magnitude is still smaller than other GDP components changes. The Indonesian government should anticipate the negative response of net exports by increasing industrial efficiency so Indonesian industry could produce commodities with cheaper production costs per unit. Therefore industry competitiveness will increase both in the domestic and international market. TABLE 2. THE IMPACT ON INDUSTRIAL OUTPUT No Industry SIM 1 SIM 2 SIM 3 1 Cooking oil made of animal and vegetables oil -0.156 0.283 -0.072 2 Rice 0.057 4.122 0.051 3 All kinds of flour made of other grains and -0.079 3.267 0.049 289 roots 4 Macaroni, spaghetti, noodle and the like 0.041 6.125 0.072 5 Sugar -0.193 -5.223 -0.027 6 chocolate and sugar confectionery -0.090 0.550 -0.017 7 Peeling and cleaning of coffee 0.023 3.079 0.034 8 Processed tea -0.072 0.815 0.062 9 Processed soybean 0.055 4.624 0.061 10 Prepared animal feeds -0.037 -0.663 0.002 11 Other foods -0.136 -0.465 -0.006 12 Beverages -0.005 3.496 0.073 13 Tobacco and Cigarettes 0.033 5.197 0.073 14 Yarn and cloth -0.309 7.257 0.511 15 Wearing Apparel -0.219 2.008 0.095 16 Products of leather -0.339 3.746 0.101 17 Footwear -0.349 3.284 0.144 18 Products of wood -0.078 0.656 0.016 19 Pulp and paper -0.275 7.437 0.236 20 Printed product -0.052 0.512 0.028 21 Basic chemical -0.225 8.142 0.093 22 Fertilizer -0.091 0.021 0.004 23 Pesticide -0.170 2.403 0.103 24 Oil Refinery 0.033 -3.055 -0.135 25 LNG -0.153 -5.169 0.029 26 Products of rubber -0.295 2.789 0.004 27 Products of plastic -0.057 5.773 0.169 28 Ceramic, Glass and products of glass 0.324 3.957 0.271 29 Cement 0.987 5.339 0.240 30 Products of iron and steel 0.046 -1.015 0.407 31 Products made of other than iron and steel -0.259 8.913 0.130 32 Other product made of iron and steel 0.352 0.656 0.254 Tabel 2. Continued No Industry SIM 1 SIM 2 SIM 3 33 Machinery and Equipment -0.087 14.415 0.068 34 Electrical product, communication and equipment -0.145 18.554 0.298 290 35 MachToolOpt -0.180 -7.959 0.012 36 Ship and Repair of Ship -0.151 -1.578 0.020 37 Motor cycles 0.025 3.110 0.102 38 Automotive except motor cycles -0.145 9.867 0.037 39 Other industry -0.258 -4.752 0.276 Note: SIM 1 : interest rate reduction by 3 percent SIM 2 : Corporate tax rate and Individual income tax reduction by 6.67 percent and 3.37 percent respectively SIM 3 : electricity price discount for industry sector by 5 percent Table 2 shows the impact of the three stimulus policies on industrial output. In general, the reduction of interest rate is expected to decrease output of most sectors. Meanwhile, tax reductions and the electricity price discount policy is expected to increase output of most industries. This means that Indonesian industry is not responsive to interest rate changes. Lower interest rates should be responded to by higher incentives for industry to borrow more money from banks in order to expand their businesses. Thus, output of industry should increase. However, these transmissions do not exist in Indonesian industry because most industries are using more labor relative to capital. In other words, most Indonesian industries are labor intensive industries. Next, the impact of tax cuts and the electricity price discount is expected to increase output of most sectors. In line with the previous argument, both tax payments and electricity prices are burdens for enterprises thus these two policies will increase the performance of industry. However, there are some sectors that experience negative impacts due to factor mobility to a sector that has higher output. It is important to note that in this CGE model we assume that factors are fully employed and mobile. Moreover, the table only covers 39 out of 52 sectors that are used in the model including agriculture, mining and minerals, trade, transportation and services. TABLE 3. THE IMPACT ON OUTPUT PRICE No Industry SIM 1 SIM 2 SIM 3 1 Cooking oil made of animal and vegetables oil 0.043 6.313 0.025 2 Rice 0.155 9.064 0.107 3 All kinds of flour made of other grains and roots 0.116 4.675 0.023 291 4 Macaroni, spaghetti, noodle and the like 0.171 5.671 0.034 5 Sugar 0.119 6.762 0.051 6 chocolate and sugar confectionery 0.104 5.736 0.053 7 Peeling and cleaning of coffee 0.182 9.383 0.108 8 Processed tea 0.141 7.823 0.002 9 Processed soybean 0.179 8.253 0.081 10 Prepared animal feeds 0.150 6.185 0.073 11 Other foods 0.131 6.754 0.045 12 Beverages 0.183 6.038 0.015 13 Tobacco and Cigarettes 0.199 6.964 0.032 14 Yarn and cloth 0.091 4.519 -0.135 15 Wearing Apparel 0.066 6.791 -0.010 16 Products of leather 0.128 4.983 0.007 17 Footwear 0.082 6.290 -0.019 18 Products of wood 0.123 6.938 0.009 19 Pulp and paper 0.089 3.097 -0.063 20 Printed product 0.087 7.173 0.042 21 Basic chemical 0.051 3.834 0.000 22 Fertilizer 0.060 4.819 0.014 23 Pesticide 0.082 2.902 -0.045 24 Oil Refinery 0.160 4.837 -0.126 25 LNG 0.027 0.912 -0.005 26 Products of rubber 0.084 6.036 0.011 27 Products of plastic 0.109 4.383 -0.050 28 Ceramic, Glass and products of glass 0.265 5.537 -0.102 29 Cement 0.496 7.442 -0.349 30 Products of iron and steel 0.173 4.400 -0.087 31 Products made of other than iron and steel 0.068 4.872 -0.013 32 Other product made of iron and steel 0.226 2.361 -0.082 33 Machinery and Equipment 0.111 1.951 -0.006 34 Electrical product, communication and equipment 0.134 -0.073 -0.085 35 MachToolOpt 0.067 2.340 0.012 36 Ship and Repair of Ship 0.040 6.045 0.002 37 Motor cycles 0.195 3.837 -0.014 Tabel 3. Continued No Industry SIM 1 SIM 2 SIM 3 38 Automotive except motor cycles 0.119 1.519 0.014 39 Other industry 0.080 2.676 -0.044 Note: SIM 1 : interest rate reduction by 3 percent SIM 2 : Corporate tax rate and Individual income tax reduction by 6.67 percent and 3.37 percent respectively SIM 3 : electricity price discount for industry sector by 5 percent 292 Table 3 shows the impact of simulations on output prices. It is expected that nearly all output prices will increase as a response to interest rate reduction and tax cut policy. Consequently, both simulation 1 and simulation 2 will result in a higher Consumer Price Index (inflation). Oppositely, reduction of electricity price for all sectors by 5 percent will result in a negative impact on output price for most sectors. Therefore, simulation 3 will result in negative inflation (deflation) as we can see in the previous table. TABLE 4. THE IMPACT ON LABOR ABSORPTION No Industry SIM 1 SIM 2 SIM 3 1 Cooking oil made of animal and vegetables oil -0.292 0.347 -0.151 2 Rice 0.092 5.989 0.030 3 All kinds of flour made of other grains and roots -0.123 4.369 0.020 4 Macaroni, spaghetti, noodle and the like 0.061 7.641 0.066 5 Sugar -0.252 -7.613 -0.077 6 chocolate and sugar confectionery -0.160 0.782 -0.046 7 Peeling and cleaning of coffee 0.045 5.376 0.047 8 Processed tea -0.127 1.265 0.098 9 Processed soybean 0.099 7.872 0.093 10 Prepared animal feeds -0.080 -1.748 -0.018 11 Other foods -0.197 -1.272 -0.052 12 Beverages 0.002 4.079 0.062 13 Tobacco and Cigarettes 0.051 6.563 0.056 14 Yarn and cloth -0.423 9.494 0.667 15 Wearing Apparel -0.281 2.031 0.081 16 Products of leather -0.389 4.058 0.097 17 Footwear -0.420 3.609 0.150 18 Products of wood -0.131 0.942 0.011 19 Pulp and paper -0.437 11.704 0.365 20 Printed product -0.117 0.852 0.041 Tabel 4. Continued No Industry SIM 1 SIM 2 SIM 3 21 Basic chemical -0.277 9.759 0.078 22 Fertilizer -0.122 -0.506 -0.030 23 Pesticide -0.238 2.515 0.078 24 Oil Refinery 0.058 -5.453 -0.263 25 LNG -0.299 -10.070 -0.054 293 26 Products of rubber -0.388 3.141 -0.037 27 Products of plastic -0.069 7.346 0.189 28 Ceramic, Glass and products of glass 0.460 4.765 0.326 29 Cement 1.432 6.965 0.295 30 Products of iron and steel 0.067 -1.979 0.509 31 Products made of other than iron and steel -0.332 11.123 0.133 32 Other product made of iron and steel 0.526 0.198 0.316 33 Machinery and Equipment -0.103 17.736 0.054 34 Electrical product, communication and equipment -0.187 24.237 0.356 35 MachToolOpt -0.258 -12.227 -0.042 36 Ship and Repair of Ship -0.232 -3.368 -0.027 37 Motor cycles 0.048 4.083 0.103 38 Automotive except motor cycles -0.158 10.671 0.031 39 Other industry -0.337 -7.022 0.324 Note: SIM 1 : interest rate reduction by 3 percent SIM 2 : Corporate tax rate and Individual income tax reduction by 6.67 percent and 3.37 percent respectively SIM 3 : electricity price discount for industry sector by 5 percent Next, we analyze the impact of both monetary and fiscal policies on labor. Expansionary monetary policy is expected to decrease labor absorption in the sectors that are negatively affected in terms of output, for instance. rice, peeling and cleaning of coffee, processed soybean and tobacco and cigarettes. The result is relevant since the reduction of output will force sectors to reduce their factor utilization. Consequently, a sector will demand less labor and this distorts the labor market. However, labor from these sectors will be utilized by other sectors that are positively affected by the policy. Previously, it was already mentioned that in the analysis it only only presents 39 out of 52 sectors that are used in the model. Thus, even though labor absorption in the industry sector is expected to decrease labor absorption for other sectors, for instance, services will increase. In simulation 2, the tax cut is expected to increase labor absorption in almost all sectors with significant magnitude. In aggregate, these results indicate a relatively larger impact on national output to other simulations. In this CGE model, it is also possible to analyze the impact of both fiscal and monetary policies on imports and exports for specific sectors. Table 5 shows the impact of three simulations on the export for 39 commodities. Reduction of interest rate is expected to decrease exports of all manufacturing commodities. The result is relevant since the previous result (Table 3) suggests that monetary policy will increase prices of output which will reduce 294 the competitiveness of domestic commodities. The impact of the other two simulations on exports is expected to vary across sectors. There are some sectors that have better export performance and some others that experience negative impact. These result by interaction between changes in the production and output prices, TABLE 5. THE IMPACT ON EXPORTS No Industry SIM 1 SIM 2 SIM 3 1 Cooking oil made of animal and vegetables oil -0.248 2.058 -0.141 2 Rice -0.800 -12.354 -0.553 3 All kinds of flour made of other grains and roots -1.031 17.738 -0.207 4 Macaroni, spaghetti, noodle and the like -1.522 8.879 -0.300 5 Sugar -0.641 -0.494 -0.275 6 chocolate and sugar confectionery -0.234 2.091 -0.118 7 Peeling and cleaning of coffee -0.407 -6.076 -0.243 8 Processed tea -0.316 -2.583 -0.004 9 Processed soybean -0.690 -6.109 -0.313 10 Prepared animal feeds -0.578 1.873 -0.281 11 Other foods -0.506 -0.326 -0.175 12 Beverages -0.409 1.415 -0.034 13 Tobacco and Cigarettes -0.767 -1.136 -0.125 14 Yarn and cloth -0.659 15.617 0.979 15 Wearing Apparel -0.481 -0.875 0.074 16 Products of leather -0.989 12.987 -0.055 17 Footwear -0.634 2.929 0.149 18 Products of wood -0.738 -1.609 -0.055 19 Pulp and paper -0.492 19.651 0.349 20 Printed product -0.477 -2.765 -0.229 21 Basic chemical -0.334 18.403 -0.002 Tabel 5. Continued No Industry SIM 1 SIM 2 SIM 3 22 Fertilizer -0.390 12.013 -0.091 23 Pesticide -0.534 24.452 0.294 24 Oil Refinery -0.656 -19.784 0.513 25 LNG -0.153 -5.169 0.029 26 Products of rubber -0.625 4.703 -0.081 27 Products of plastic -0.805 16.969 0.375 28 Ceramic, Glass and products of glass -1.963 8.407 0.755 29 Cement -3.677 -5.730 2.588 30 Products of iron and steel -1.280 16.841 0.648 295 31 Products made of other than iron and steel -0.508 13.339 0.099 32 Other product made of iron and steel -1.680 -17.520 0.608 33 Machinery and Equipment -0.887 37.655 0.050 34 Electrical product, communication and equipment -0.752 37.759 0.478 35 MachToolOpt -0.532 -18.673 -0.095 36 Ship and Repair of Ship -0.344 5.335 -0.018 37 Motor cycles -1.665 24.162 0.120 38 Automotive except motor cycles -1.019 43.940 -0.122 39 Other industry -0.595 -19.858 0.324 Note: SIM 1 : interest rate reduction by 3 percent SIM 2 : Corporate tax rate and Individual income tax reduction by 6.67 percent and 3.37 percent respectively SIM 3 : electricity price discount for industry sector by 5 percent Table 6 suggests that both monetary and fiscal policies will increase imports of manufacturing sectors. It is expected that an increase in real household consumption will result in higher demand of manufacturing commodities. However, the increasing demand of commodities cannot fully be supplied by domestic commodities which are reflected in the small increase of output in Table 2. As a result, Indonesia must import more manufacturing commodities to satisfy the demand. In terms of magnitude, simulation 2 will result in a higher impact on imports which is an increase by 4 percent up to 58 percent for specific commodites. 296 TABLE 6. THE IMPACT ON IMPORTS No Industry SIM 1 SIM 2 SIM 3 1 Cooking oil made of animal and vegetables oil 0.3282 33.6886 0.1945 2 Rice 0.6354 36.6517 0.4327 3 All kinds of flour made of other grains and roots 0.6393 28.1725 0.1944 4 Macaroni, spaghetti, noodle and the like 1.0960 39.5387 0.2834 5 Sugar 0.2458 14.4022 0.1415 6 chocolate and sugar confectionery 0.5926 32.7133 0.3200 7 Peeling and cleaning of coffee 1.1343 58.9046 0.6819 8 Processed tea 0.8314 46.1669 0.1047 9 Processed soybean 1.1445 53.9746 0.5452 10 Prepared animal feeds 0.3008 12.7559 0.1505 11 Other foods 0.6928 36.3147 0.2885 12 Beverages 1.0625 38.4170 0.1713 13 Tobacco and Cigarettes 0.4163 18.3799 0.1369 14 Yarn and cloth 0.5294 28.2213 -0.4903 15 Wearing Apparel 0.5263 46.4698 0.0684 16 Products of leather 0.3029 21.4787 0.1346 17 Footwear 0.5316 39.7775 0.0344 18 Products of wood 1.1189 28.8471 0.1098 19 Pulp and paper 0.0999 12.4891 0.0019 20 Printed product 0.4105 34.4668 0.2475 21 Basic chemical -0.1205 4.1670 0.2259 22 Fertilizer 0.1650 14.5442 0.0698 23 Pesticide 0.1934 7.7580 -0.0767 24 Oil Refinery 0.2557 6.3367 -0.2139 25 LNG -0.0781 -2.6460 0.0146 26 Products of rubber 0.3131 16.1818 0.1008 27 Products of plastic 0.5791 24.2653 -0.0743 28 Ceramic, Glass and products of glass 1.6126 24.4689 -0.2089 29 Cement 3.0683 33.9412 -1.1777 30 Products of iron and steel 0.9364 11.2462 0.0592 31 Products made of other than iron and steel 0.1255 15.7614 0.1421 32 Other product made of iron and steel 1.4974 12.6457 -0.1114 33 Machinery and Equipment 0.7518 11.1433 0.0850 34 Electrical product, communication and equipment 0.4662 11.8753 -0.0176 35 MachToolOpt 0.3168 10.5057 0.1582 Tabel 6. Continued 297 No Industry SIM 1 SIM 2 SIM 3 36 Ship and Repair of Ship 0.5177 4.6759 0.0813 37 Motor cycles 0.6589 15.5777 0.0491 38 Automotive except motor cycles 0.4953 8.8923 0.0975 39 Other industry 0.2325 9.9354 0.0556 CONCLUSSION AND POLICY RECOMMENDATION The government and Central Bank intervention through fiscal and monetary policy is expected to increase Indonesian economic performance. This means that both fiscal and monetary policies are quite powerful to minimize the impact of external and internal shocks. However, there are some issues that need to be considered by the policy- makers based on the results of the CGE model simulation. The first issue is regarding scale or magnitude of intervention. If the impact of internal or external shocks on Indonesian economy is quite big, the government should intervene at a reasonable scale as well. The second issue is the types of policy tools that are used. Simulation 2 and Simulation 3 show that fiscal policy with different tools will result in different impacts. It will depend on the transmissions that have occurred. Third, the result of simulation 1 suggests that Indonesian industry is not so responsive to changes in the interest rate. This means that fiscal policy is still preferable to improve the real sector relative to monetary policy. Finally, government should be aware of Indonesian industry competitiveness. Most industrial sectors respond negatively in terms of exports and imports. Moreover, it is also expected that the domestic market will have many more imported commodities as Indonesian real household consumption increase. 298 REFERENCES Al-Amin, A. Q., Jaafar, A. H., and Siwar, C. 2008. Trade and Environment: External Shocks and Vulnerability – A Computable Generable Approach to the Malaysian Economy. Social Science Research Network Working Paper No. 1114674. Centre For Development and Integration. 2006. Trade Liberalization and Its Impact on Leather Footwear and Garment Industries in Vietnam. Cui, L., and Syed, M. 2007. The Shifting Structure of China’s Trade and Production. IMF Working Paper No. WP/07/214. Dixon, P.B., B.R. Parmenter, J. Sutton and D.P. Vincent (1982). ORANI: A Multisectoral Model of The Australian Economy, Amsterdam: North-Holland Guidi, F. 2009. The Economic Effects of Oil Price Shocks on The UK Manufacturing and Services Sector. MPRA Working Paper No. 16171. Warr, P, Marpudin, A, Helder, d.C and Prem, J. T (1998). ‗WAYANG: An Empirically-Based Applied General Equilibrium Model of the Indonesian Economy’, mimeo, Australian National University Warr, P (2005). ‗Food Policy and Poverty in Indonesia: A General Equilibrium Analysis‘, Australian Journal of Agricultural and Resource Economics, vol. 49, no. 4, December, 429-451. Wittwer, G (1999), WAYANG: a General Equilibrium Model Adapted for the Indonesian Economy, Edition prepared for ACIAR Project no 9449. CIES, University of Adelaide (in association with RSPAS, ANU, CASER, Bogor, and CSIS, Jakarta). 299 THE ROLE OF SUPPLY CHAIN FLEXIBILITY AND ITS ANTECEDENT VARIABLE IN INCREASING COMPETITIVE ADVANTAGE OF MANUFACTURING INDUSTRIES IN EAST JAVA Sahnaz Ubud Sekolah Tinggi Ilmu Komputer Indonesia (STIKI – Malang), Indonesia
[email protected] Marthin Nanere Latrobe University, Bendigo, Australia
[email protected] ABSTRACT Manufacturing companies today seem to pay considerable attention to overall chain and distribution systems. These systems start from the supply of raw materials to the end consumer. Current research on supply chains has mainly focused on the internal supply chain and ignored the element of environmental change (flexibility), which can significantly influence the overall supply chain system.Due to constant changes in global competitive environments, an organisation is required to implement a supply chain system in order to improve its capabilities in producing and offering low price, high quality, and innovative products to its customers in a timely and cost-effective manner. Using the theory of Resource Based View (RBV) as its basis, this research investigated the relationships between the uncertainties of supply chain environments, interorganisational relationships, information sharing and supply chain flexibility in order to increase competitive advantage of manufacturing companies in East Java. Competitive advantage can be achieved if both company flexibility and supply chain flexibility is considered. Data was collected from 71 large-scale manufacturing companies registered by the Industrial and Trading Department of East Java. Partial Least Squares (PLS) analysis was employed. The findings suggest that environmental uncertainties significantly influence interorganisation relationships; interorganisation relationships in turn, influence information sharing, and supply chain flexibility significantly influences competitive advantage. It was also found that there is an indirect effect of environmental uncertainties toward competitive advantage through the influence of interorganisation relationships, information sharing and supply chain flexibility. These findings support the RBV theory. Finally, supply chain flexibility is not only determined by environmental uncertainties, but also by elements in the interorganisation relationships (such as trust, commitment and conflict) and information sharing among manufacturing companies. This flexibility increases competitive advantage. Keywords: Supply chain flexibility, Envronmental uncertainty, Interorganisational relationship, Information sharing, Competitive advantage.. INTRODUCTION Along with the increasingly globalised market competition the business world is complex (Basu & Siems, 2004). Customers demand more and more. Customers have started demanding aspects of the response speed, innovation and flexibility. Iindustries began to 300 realise that in order to provide cheaper products with good quality, internal improvements in a manufacturing company are not sufficient (Indrajit & Djokopranoto, 2002; Pujawan, 2005; Simchi levi, 2003). Tight competition today occurs among companies from many different countries (Easton & Zhang, 2003). Particularly, as a result of globalisation and the free market economic, many countries search for cooperation to set up organizations such as the WTO (World Trade Organization), AFTA (ASEAN Free Trade Area) and APEC (Asia- Pacific Economic Cooperation). Companies are responsible for the entire chain process from product design, demand forecasting, material procurement, production, inventory control, storage, distribution/transportation to the nearest distributor, wholesaler, small traders, retailers, customer service, process payments, until the final consumers (Simchi Levi, 2003). Awareness of the importance of all parties to create a cheap product, good quality, and fast process is known as supply chain management (Chopra & Meindl, 2001; Pujawan 2005). Supply chain management is a network of companies that together work to create and deliver a product into the hands of end users (Indrajit, 2002; Simchi-Levi, 2003; Pujawan, 2005). Supply chain management is one of the competitive strategies in the 21st century (Gunasekaran & Ngai, 2003; Narayanan & Raman, 2004; Gunasekaran et al., 2004; Koh et al., 2006). One very important strategy in conducting supply chain management is to foster a good and improving daily communication among all supply chain partners, ranging from downstream to upstream (Chopra & Meindl, 2001; Simchi & Levi, 2003; Pujawan, 2005). However, in practice there are so many obstacles that many doubt that it can successfully be achieved. This is done through a long process and between the parties knowing each other. Thus, supply chain partners must be dependent on each other in the long term. Optimisation is not possible to be accomplish if suppliers are constantly different and changing ( Indrajit & Djokopranoto, 2002). Leading companies in the world have been successful in implementing the concepts of supply chain management. Names such as P & G, Wal-Mart, Hewlett Packard, IBM, Chrysler, Dell Computers, and Sun Microsystems are among those big companies that have successfully made a fortune on their success to implement the concept of supply chain management. There are several companies in Indonesia that are fully aware that supply chain management is a necessity. Supply chain management helps companies achieve effectiveness. This phenomenon has become a common understanding in recent years, especially when associated with an open market. Especially as 2008 is the deadline for the six ASEAN 301 countries in order to enforce the ASEAN Single Window (ASW) in their respective countries. ASEAN countries will be able to improve performance based on the supply chain management approach, such as shortening the process and procedures for the desired trade efficiency and reducing costs and creating a positive competitiveness in Southeast Asia. East Java is one of the biggest contributors of the Indonesian national economy with national output of 15.51% after DKI Jakarta (17.12%). In 2004 the economic growth rate of East Java reached 5.80%, higher than that of the nation, 4.63% (BPS, 2005. East Java's economy is dominated by the manufacturing industry sector (29.61%), trade, hotels & restaurants (26.7%) and agriculture (17.5%). East Java currently has an important role in the manufacturing sector in Indonesia. Manufacturing industries in East Java accounted for roughly 20% of the value added generated by manufacturing industries in Indonesia and 25% of workers working in Indonesian manufacturing sector (BPS, 2005). This contribution to GDP is quite large. Since the manufacturing sector is now a mainstay for the economy in East Java, this sector has been chosen for this study. Following the advice from some researchers namely, Lummus et al. (2003), Pujawan (2004), Sanchez & Perez (2005), Kumar et al. (2006) and Stevenson & Spring (2007), there is a need to undertake empirical research on supply chain flexibility. This research focuses on supply chain flexibility associated with the uncertainty of the supply chain environment. Supply chain flexibility arises to improve the manufacturing flexibility concept that only focused on the internal aspects of a company (Duclos et al., 2003; Pujawan, 2004; Sanchez & Perez, 2005; Kumar et al., 2006). Supply chain flexibility should be integrated and customer- oriented. Duclos et al. (2003) stated that the previous literature on flexibility is quite limited in considering the function of cross-functional, cross-businesses from the nature of supply chain management. Pujawan (2004) proposed a framework of the concept of supply chain flexibility, which is the adjustment between the concept of supply chain management and manufacturing flexibility. The framework is expected to represent the concept of supply chain flexibility at the start of the flow upstream to downstream. Pujawan (2004) also states that supply chain flexibility should be considered as a major determinant in a company's competitive advantage. Increased competition in the supply chain, free trade and globalisation, complex customer demands and the importance of conservation of time, supply chain flexibility have become critical issues in modern organisations (Kumar et al., 2006). Supply chain flexibility should 302 represent a potential resource to improve significantly the efficiency and company performance measures (Sanchez & Perez, 2005). Flexibility can improve the company's competitive advantage and decision-making process of the implementation of technology (Chang et al., 2003; Zhang et al., 2003). According to Li et al. (2005), a company has advantages in the competition if the price, quality, delivery, innovation and new product launches are better than its competitors. Competition among companies today is very tight. Supply chain flexibility and the antecedent variable in creating competitive advantage is still a matter for debate in the research. Therefore, this study attempts to clarify the relationship between supply chain flexibility and its antecedent variable to competitive advantage. From the description on the background and research gap indicated, the problems of the theoretical contradictions of the anticipated research results in an environment of uncertainty in the supply chain through supply chain flexibility and competitiveness., are examined. Formulation of the problem is the absence of clarity of the relationship between environmental uncertainty, interorganisational relationships, and information sharing to both supply chain flexibility and also to competitiveness. RESEARCH HYPOTHESES The ability to share powerful information can ensure that companies continuously manage and improve supply chain networks which indirectly means to control the information network continuously so that further contributions to improving the long-term value occur.. If the company is able to share information with business partners, they will be able to increase firm competitiveness (Li et al., 2005; Zhou & Benton, 2007; Carr & Kaynak, 2007; Thatte, 2007). The ability to share powerful information means the ability to process more powerful information which can contribute to the control of information and control of electronic trading networks being implemented properly. The ability to use information technology in the organisation will provide the option of controlling the operating environment (Saas, 2006). Without the use of information technology, the organisation will be threatened in the control systems, and operations cannot exploit the company's resource potential. Organisations with the ability to share powerful information can be associated with business partners without limit, which is much closer and faster in dealing with business networks. Information sharing can provide flexibility and be able to improve corporate response in the implementation of a supply chain (Stevenson & Spring, 2007). The information shared includes information on end customer demand, sales forecasting, order status, inventory 303 levels of the company, availability of capacity, waiting time, and quality. Information sharing in the supply chain flexibility can improve transparency, avoid lost sales, accelerate the payment cycle, create and build trust, avoid excessive production, and reduce excess inventory. From these arguments, the hypothesis was developed as follows: H1: Information sharing is positively related to supply chain flexibility Environmental uncertainty in the supply chain is an important thing to control the supply chain flexibility (Li & Lin, 2006). The highly environmental uncertainty would change the market so that the organization is required to build a partnership strategy with supply chain members to increase flexibility in the organisation and reduce the risks associated with uncertainty (Prater & Smith, 2001; Liao, 2006). The relationship between uncertainty and flexibility are critical issues if flexibility is seen as a response capable of adapting to an uncertain envronment (Vickery et al., 1999; Das & Malek, 2003; Graves & Tomlin, 2003 ; Pujawan, 2004; Sanchez & Perez, 2005; Liao, 2006). Flexibility should enable manufacturers to respond quickly and efficiently to dynamic market changes (Pagell & Krause, 1999). Increased flexibility in the logistics system should be able to respond to strategies in uncertain environments (Pagell & Krause, 2004). Liao (2006)states that flexibility is created by connecting the uncertainty with manufacturing operations. Liao (2006) suggested that a higher level of acceptance of environmental uncertainty will require the application of supply chain flexibility. So the uncertainty in the supply chain environment has a very close relationship, if analyzed with the concept of supply chain flexibility (Vickery et al., 1999; Pujawan, 2004; Sanchez & Perez, 2005; Kumar et al., 2006; Fantazy, 2007). H2: Environmental uncertainty is positively related to supply chain flexibility Interorganizational relationships in an organization should be well established. Without a strong commitment from the company to improving relationships with business partners will lead to organizational difficulties developing. Companies can improve the ability to compete. According to Patrakosol (2006), an interorganizational relationship is a challenge in applying the concept of organizational supply chain flexibility, to produce cost-effectiveness and to achieve high profits. This becomes important for some companies to connect with business partners. Lack of trust between suppliers and manufacturers will hinder a good relationship with business partners. The flow of accurate and real information is needed in collaboration with business partners. Interorganisational relationships with information technology facilities are needed to share information (Perez & Sanchez, 2001; Backstrand & Safsten, 304 2005; Sass, 2006). Information sharing with business partners will make the company more effective in coordinating the supply network chains (Shore & Venkatachalam, 2003). The system can include electronic data interchange (EDI) systems, advanced planning and scheduling (APS), a system of collaborative planning, forecasting and replenishment (CPFR) and the customer and supplier relationship management (C/SRM) and module packages enterprise resource planning (ERP ) (Stevenson & Spring, 2007). Interorganizational relationships also have implications for how to design and manage supply chain flexibility in firms (Perez & Sanchez, 2001; Das & Malek, 2003; Stevenson & Spring, 2007; Wang & Wei, 2007). One example is to use of the system vendor managed inventory (VMI). Using the system supplier is located in the upstream network capable of responding directly to provide information on demand. Stevenson & Spring (2007) and Wang & Wei (2007) ; it requires that flexibility can be achieved if the entire supply chain network is to share data to all business partners. H3: Interorganizational relationship is positively related to supply chain flexibility The research directly connects the supply chain flexibility and competitive advantage. Flexibility is the ability to adapt to change, and it is important for the company to maintain its superiority in the future (Zhang et al., 2003; Chang et al., 2003). In the long run, supply chain flexibility is used to improve enterprise competitiveness and should affect the overall profits. Companies are capable of carrying out production processes with suppliers in a different place if the management can overcome the problems both internally and externally. Besides, the emphasis on various dimensions of supply chain flexibility should be connected directly to competitive advantage (Fantazy, 2007). As a consequence, supply chain flexibility can affect the shape of competition and should affect the overall profits. Companies need to know to what extent supply chain flexibility is applied in order to achieve competitive advantage, in terms of cost, quality, innovation and the time it takes to the market (Kumar et al., 2006). The main characteristic of supply chain management is the coordination of activities among interdependent organizations that are dependently woven from suppliers to end customers to create sustainable value with minimal cost. To develop a competitive advantage, managers need to coordinate supply chain relationships and increase the flow of information and effort in communicating (Stevenson & Spring, 2007). Chang et al., (2003) suggested a model that will help organizations to select supply chain strategies based on the customers at the time of entering the market in an increasingly competitive global market. If 305 the supply chain is to take advantage of the partner company's core competencies, it should also be prepared to manage the uncertainty that might occur because in practice the company partners are associated with the environment and with ethics. Zhang & Lim (2003) suggested that in global competition, technological change must be considered in reaching a competitive advantage which is the main motivation behind the company's supply chain. From these arguments the following hypothesis is formed. H4: Supply chain flexibility is positively related to competitive advantage METHODOLOGY Data Collection The population for the research was the big scale manufacturing industries registered in industrial departments in the north – south corridor of East Java, because that corridor gives greater contribution than the other corridors, and have websites to support their supply chain management. Thus this research is concentrated in the region of Gresik, Surabaya, Sidoarjo, Mojokerto, Pasuruan and Malang, with a population of 177 companies (Deperin, 2008). The questionnaire was distributed directly to the companies included in the list of respondents. The sample for this research was based on the following formula: n = 2 . 1 d N N + n = the sum of sample N = the measurement of population = 2 %) 10 .( 177 1 177 + = 64 respondents From the slovin formula the mínimum sampel was 64 and from the field study, the sample collected was 71 respondents. The respondents were the managements of companies involved in the implementation of the company's supply chain. Respondents were selected consisting of departments involved in the implementation of a supply chain. The department is the supply chain, production, operations, PPIC, product development, procurement or distribution function. The Operationalization Variable 306 The operationalization of environmental uncertainty in this study was how much companies are able to anticipate the changes but are not sure of the supplier and the customer both internally and externally that may influence the strategy, structure and supply chain performance. TABLE 1: VARIABLE, DIMENSION, INDICATOR OF AEU AND SUPPORTING REFERENCES Variable Dimension Indicator References The Anticipation of Environmental uncertainty (AEU) The Anticipation of Supplier uncertainty 1. The Anticipation of raw material prices that are not consistent 2. The Anticipation of quality raw materials that are not consistent 3. The Anticipation of the amount of raw materials that are not consistent Pujawan (2004), Bhatnagar & Sohal (2005), Prater & Smith (2001), Li & Lin (2006), Liao (2006). The Anticipation of Customer uncertainty 1. The Anticipation of the information of the products sales that are not consistent 2. The Anticipation of fluctuating demand for products 3. The Anticipation of the product orders that are not consistent Vickery et al. (1999), Pagell & Krause (1999), Prater & Smith (2001), Das & Malek (2003), Graves & Tomlin (2003), Bhatnagar & Sohal (2005), Sanchez & Perez (2005), Li & Lin (2006), Liao (2006) The operationalisation of an interorganizational relationship in this study was the level of trust, commitment and help to solve common problems that occur between companies and business partners. TABLE 2: VARIABLE, DIMENSION, INDICATOR OF IR AND SUPPORTING REFERENCES Variable Dimension Indicators References Interorganizational Relationship (IR) Trust 1. Honesty 2. nondisclosure 3. Agreements meet Perez & Sanchez (2001), Shore & Venkatachalam (2003), Backstrand & Safsten (2005), Li & Lin (2006), Sass (2006), Patrakosol (2006), Wang & Wei (2007). 307 Commitment 1. Keeping the Covenant made 2. Maintaining long-term relationship 3. Maintaining collaboration Perez & Sanchez (2001), Shore & Venkatachalam (2003), Backstrand & Safsten (2005), Li & Lin (2006), Patrakosol (2006), Wang & Wei (2007). Problem Solving 1. The difficulty in making the product 2. Performance does not match the expectation 3. Conflict resolution Wang & Wei (2007) The operationalisation of information sharing in this study was the sharing of information between suppliers, companies and customers by using information technology used by the company with its business partners. This is to eliminate problems that may occur between supply chain partners. TABLE 3: VARIABLE, DIMENSION, INDICATOR OF IS AND SUPPORTING REFERENCES Variable Dimension Indicators References Information Sharing (IS) Information sharing with supplier 1. Information sharing about the next product planning. 2. Information sharing about the change of product design 3. Information sharing about the change of product volume. Shore & Venkachalam (2003), Li et al. (2005), Li & Lin (2006), Sass (2006), Liao (2006), Patrakosol (2006), Zhou & Benton (2007), Carr & Kaynak (2007), Thatte (2007) Pembagian informasi didalam perusahaan manufaktur 1. Information sharing about product capacity 2. Information sharing about the status of product demand 3. Information sharing about the waiting time of product. 4. Information sharing about product delivery. Perez & Sanchez (2001), Shore & Venkatachalam (2003), Li et al. (2005), Backstrand & Safsten (2005), Sass (2006), Liao (2006), Patrakosol (2006), Zhou & Benton (2007), Thatte (2007). Information sharing with customer 1. Information sharing about the product which customers want 2. Information sharing about the product quality. Li et al. (2005), Li & Lin (2006), Sass (2006), Liao (2006), Zhou & Benton (2007), Carr & Kaynak (2007), Thatte (2007) The operationalisation of supply chain flexibility in this study was the ability of supply chain partners to respond to market changes in achieving or maintaining competitive advantage. The ability to respond from the supply chain partners must be built primarily from parts suppliers, the development of new products, product processing and shipping the product. TABLE 4: VARIABLE, DIMENSION, INDICATOR OF SCF AND SUPPORTING REFERENCES 308 Variabel Dimensi Indikator References Supply chain flexibility (SCF) Supply flexibility 1. The supplier availability 2. The supplier capability 3. The supplier quality Duclos et al. (2003), Das & Malek (2003), Pujawan (2004), Sanchez & Perez (2005), Kumar et al. (2006), Liao (2006), Wang & Wei (2007), Fantazy (2007) Product development flexibility 1. The confirmation about new raw material 2. The communication about new product. 3. The capability create new product Vickery et al. (1999), Chang et al., (2003), Pujawan (2004), Sanchez & Perez (2005), Kumar et al. (2006), Fantazy (2007) Production flexibility 1. Production capability 2. The capability of product machine 3. Outsourcing 4. The capability of worker Vickery et al. (1999), Prater et al. (2001), Zhang et al. (2003), Duclos et al. (2003), Graves & Tomlin (2003), Pujawan (2004), Sanchez & Perez (2005), Kumar et al. (2006), Liao (2006), Fantazy (2007) Delivery flexibility 1. Delivery Product 2. Transportation 3. The date of Delivery Prater et al. (2001), Chang (2003), Pujawan (2004), Sanchez & Perez (2005), Kumar et al. (2006), Liao (2006), Fantazy (2007) The operationalisation of competitive advantage in this study was how much the company was able to create a defence over its competitors in terms of customer service, product innovation, marketing innovation, price, time to market and quality. To measure this variable, indicators were developed from the research. TABLE 5: VARIABLE, DIMENSION, INDICATOR OF CA AND SUPPORTING REFERENCES Variabel Indikator References Competitive advantage (CA) 1.Customer service 2. Product innovation 3.Cycle time 4.Price 5.Time to market 6.Quality Zhang et al. (2003), Chang et al. (2003), Li et al. (2005), Bhatnagar & Sohal (2005), Carr & Kaynak (2007), Thatte (2007) RESULTS 309 TABLE 6: DEMOGRAPHIC DISTRIBUTION OF RESPONDENTS Industrial Area Number Percentage Gresik 11 15,40 Surabaya 18 25,35 Sidoarjo 16 22,54 Mojokerto 5 7,04 Pasuruan 15 21,13 Malang Raya 6 8,45 Jumlah 71 100 Type of Product Number Percentage Food and drink 12 16,90 Cigarette 7 9,86 Textile 6 8,45 Sandal 2 2,82 Packaging 7 9,86 Fertiliser 3 4,23 Pharmacy 9 12,68 Cement 1 1,41 Metal pipe 2 2,82 Heavy metal 2 2,82 Metal products 3 4,23 Plastic products 2 2,82 Electronic 2 2,82 Car 2 2,82 Ship 3 4,23 Furniture 8 11,27 Number 71 100 The years in operation Number Percentage Less 10 years 0 0 Between 11 – 14 years 7 9,86 Between 15 – 19 years 13 18,31 Between 20 – 24 years 21 29,58 Lebih dari 25 years 30 42,25 Total 71 100 Information Technology is used Number Percentage MRP II 40 from 71 respondent 56,33 ERP (Enterprise Resource Planning) 47 from 71 respondent 66,19 WMS (Warehousing Management System) 25 from 71 respondent 35,21 CRM (Customer Relationship Managemet) 30 from 71 respondent 42,25 SRM (Supplier Relationship Management) 26 from 71 respondent 36,62 DSS (Desicion Support System) 28 from 71 respondent 39,43 EDI (Electronic Data Interchange) 23 from 71 respondent 32,39 Bar Coding 19 from 71 respondent 26,76 RFID (Radio Frequency Identification) 1 from 71 respondent 1,41 310 Table 6 shows manufacturing industries in East Java are concentrated in Surabaya which gave the largest proportion of value. Mojokerto has the smallest number of proportion. Implementation of supply chain management has been conducted in various manufacturing industries in East Java. Sectors that contribute most to the company's value added is the food and beverage industry. Table 6 also shows ERP is an information technology mostly used by companies in implementing supply chains. While RFID is a technology used by most small manufacturing companies who were respondents. Construct Measurement Construct measurement involves assessing the validity and reliability of the scales. A validity test is intended to determine whether the measure actually used just to measure objects (instruments) are measured. There are many methods used to test the validity. This research used test of discriminant validity and convergent validity. The reliability test can be interpreted as the level of confidence in the results of a measurement. Validity and reliability are considered in this study by using the principle of second order confirmatory factor analysis. TABLE 7 : LOADING FACTOR, VALIDITY AND RELIABILITY VALUE Loading Factor T- Statistic Average variance extracted (AVE) Internal Consistency R- Square Sharing 0.826 0.934 X1.1 0.948 48.890 X1.2 0.909 38.272 X1.3 0.868 20.492 uncertainty 0.943 0.970 X2.1 0.972 122.561 X2.2 0.970 104.464 inter 0.862 0.949 X3.1 0.952 59.108 X3.2 0.946 62.117 X3.3 0.887 31.507 SCF 0.876 0.966 0.548 Y1.1 0.967 116.966 Y1.2 0.955 77.207 Y1.3 0.944 60.360 Y1.4 0.876 27.945 competitive 0.638 0.912 0.511 Y2.1 0.691 9.616 Y2.2 0.786 12.856 Y2.3 0.610 6.089 Y2.4 0.793 16.868 Y2.5 0.934 60.839 311 Y2.6 0.927 35.182 Disciminant validity is based on the value of cross-loading and the value of variance Extracted (AVE) . The indicator has good reliability when its value is greater than 0.70. while if the factor loading was 0.50 to 0.60 ,it can be maintained for a model which is still in development. Table 7 shows that the value of cross loading was more than 0.5. Thus in this research the instruments are appropriate for further analysis. Table 7 shows that average value of variance Extracted (AVE) has a value of more than 0.5. The value of AVE is above what is appropriate for the criteria for further analysis. The reliability test which is used in this study is the internal consistency. The Limitation value is received for the composite reliability is 0.7, although this is not an absolute standard. Table 7 shows the composite score reliability requirements have been met by all variables with a value above 0.70.so the instrument is feasible for further analysis. The Evaluation of Structural Model All hypotheses in the research were tested simultaneously using the Partial Least Squares (PLS). The research used the second order confirmatory factor analysis model. FIGURE 1 : THE OUTPUT OF CONSTRUCT MODEL TABLE 8: THE SIGNIFICANCE OF THE VARIABLE. original sample estimate T-Statistic Statement 312 uncertainty -> SCF 0.431 4.111 Significant inter -> SCF 0.031 0.307 Not significant Sharing -> SCF 0.396 3.182 Significant SCF -> competitive 0.715 11.590 Significant DISCUSSION AND CONCLUSIONS This study results in a significant effect of information sharing with supply chain flexibility. These results support the proposition from Spring & Stevenson (2007). According to Spring & Stevenson (2007) the flow of accurate and real nformation in the supply chain flexibility needs to consider the sharing of information as one of the most important factors. According to Lummus & Vokurka (2003) who indicate that the sharing of information can also provide the flexibility and improvements in responding to supply chain and shared information includes the end consumer demand, sales forecasting, order status, inventory levels, the capacity, waiting time and quality. This is because by sharing information we can improve the transparency in the company, to avoid losing sales, expedite payments, create trust, to avoid excess production and reduce inventories. Manufacturing companies in East Java was important that by sharing information, they can increase the flexibility in the supply chain. Manufacturing industry is utilizing information technology available today to share information by utilization of the Internet with the e- business concept. There were more manufacturing industries to facilitate the sharing of information to make business partners. Especially in terms of the cost of the internet today that is more affordable. So that the manufacturing industry began to leave the conventional methods such as telephone or fax. It is support for other information technology like EDI, SRM, SCM, ERP which have good facilities that are used intra-firm or extra-firm. When it is growing information technology in Indonesia will be familiar, but which needs to be considered and the anticipation is a lack of skilled human resources to manage or share information to business partners. Most companies outsource all of their information technology and lack of training is occurs as it is still very dependent on outsourcing. This research produced a significant effect between the anticipated supply chain environmental uncertainty on supply chain flexibility directly. The higher the firm's ability to anticipate supply chain environmental uncertainty, the higher the company's supply chain flexibility. This indicates that the current market changes which tend not to be due to the 313 growing customer demand leading to uncertainty as the critical supply chain environments grows, so the company must implement supply chain strategies that are flexible to changes that occur in a business environment. Manufacturing industries in East Java should consider uncertainty in supply chain management, especially in supply chain flexibility. Uncertainty is the main factor that must be considered so a flexible supply chain can be realized. Because uncertainty can lead to distrust in the plan are made. In anticipation of this, a company often creates an effective security along the supply chain (as was usually done by several respondents in this study according to interviews). This security may be a safety stock, or safey time production and transportation capacity. The results show that there is no significant effect between interorganization relationships with supply chain flexibility. This is because the relationship that exists between interorganization manufacturing industry with its business partners are still weak in implementing supply chain flexibility. Interorganization relationships in manufacturing industries in East Java has not shown encouraging results. This can be seen from the results of this research output. Indeed in Indonesia are still weak to trust, have commitment and sit together with business partners to solve the problems that occur in the manufacturing industry. This is because of the fears of the manufacturing industry if the business partners were not able to maintain confidentiality. Moreover, often between the partners business and manufacturing industry failed to meet contractual agreements that had already been agreed. Suppose that at the time also they will launch a new product then the company should choose the supplier before the product design process begins. So that these suppliers can be involved in product design. Of course, not all suppliers need to be involved early in the design of new products. This research produced a significant influence between supply chain flexibility with competitive advantage. This is supported by what is suggested by Sanchez & Perez (2005) who indicate that supply chain flexibility can improve the company's advantage, especially in the decision-making process of the implementation of technology and can become an important source of competitive advantage. Vickery et al. (1999) produced a significant relationship between supply chain flexibility in supply chain performance which is used to achieve competitive advantage. Pujawan (2004) states that flexibility is seen as the main determinant of competition in the growing market intensity. With the company's supply chain 314 they are able to develop competitive advantages, such as in delivery, innovation and flexibility. Vokurka et al. (2003), suggests the main trends in supply chain management are the globalization of markets and supply sources and must focus on the competition from the company with a competitive advantage of the entire supply chain. Vickey et al. (1999) observed that for companies to compete through flexibility in applying procurement practices or the supply chain for the current global conditions are very important. Supply chain flexibility in the manufacturing industry in East Java was very important in improving competitive advantage. Performance of the manufacturing sector in Indonesia is currently trying to improve the competitiveness of industrial manufacturing, although the ability is still low. Competitive advantage in the current era is not only determined by the ability of an industry to create a lot of output unity of time. Productivity is important, but not quite as important to compete on the market. Customers began to differentiate products based on quality. Even realizing that product quality is highly dependent on the process, people and the system as a whole. The quality of control is no longer enough just to operate with the product inspection model, but more fundamentally with the process. Even the industry began to realize that product quality is also not free from quality raw materials sent by the suppliers . CONTRIBUTION AND LIMITATIONS The Theoretical contribution of this research is the development of conceptual knowledge about the increased flexibility in the supply chain which is based on the grand theory of the resource-based view. This research contributes to the view of the supply chain flexibility to explore the relationship with the information sharing, interorganizational relationships which currently received less attention than other research. Because the concept of supply chain flexibility is always associated with the anticipation of supply chain environmental uncertainty. In this study it also explores the competitive advantage and more expanded dimensions of competitive advantage. So far, the concept of competitive advantage is still referring to the price, innovation and quality. In this study we looked more at the time to market, because time to market is now a major consideration in analyzing the competitive advantage in the supply chain (Pujawan, 2005). The practicalcontribution of this research is expected to result from this study can provide managerial implications in managing the supply chain flexibility in the manufacturing industry. In the supply chain flexibility applied in this study suggests that supply chain 315 flexibility is not just enough uncertainty with respect to anticipate the supply chain environment alone, but also in the sharing of information interorganizational relationship. So by looking at factors other competitive advantages to be gained can be realized by the company.. 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[email protected] [email protected] [email protected] ABSTRACT The mobile phone has become a catalyst for a social change. When the overseas migrant workers (OMWs) from Kecopokan were buying and using mobile phones to open their interpersonal communication opportunities, they were exposing themselves and their families to impacts that may accompany the technology and service. Family ties are built and maintained in the many phone calls and text messages circulated. In fact, some overseas migrant workers use mobile phones to parent their children. In its intense usage, while text messaging has been perceived as a replacement of direct communication, the unconstrained voice calls can be disrupting. As a commodity, mobile phones have become a symbol of newfound wealth and a perceived way to acquire higher social status. Such phones have become a new household necessity, and people are learning how to creatively manipulate the system to make the service more affordable. With mobile phones, transfer of knowledge from OMWs to their families has become possible. People have also able to increase their incomes because mobile phones can be a tool for managing business and a commodity for trading. Last but not least, mobile phones assist information exchange in ways that can provide benefits. INTRODUCTION Telecommunication technology development, with mobile phone service as one of its results, surely has become a catalyst for social change. Since a mobile phone has the potential to give benefits as well as detriments, users have to be ready for change in their lives, no matter if it is good or bad. Nowadays, the mobile phone has become one of the most ubiquitous and utilized products of telecommunication technology. Billions of people in the world own mobile phones and use them in their daily lives. According to the International 320 Telecommunication Union (ITU) (2009b), in 1997 there were only approximately 215 million mobile phone subscribers in the world. However, as it can be seen in Table 1, the figure swelled to 1.157 billion in 2002 and, amazingly, to 3,305 billion in 2007. TABLE 1 KEY GLOBAL TELECOM INDICATORS FOR THE WORLD MOBILE PHONE SECTOR 1997 – 2007 Mobile phone subscribers Year (millions) 1997 215 1998 318 1999 490 2000 738 2001 961 2002 1157 2003 1417 2004 1763 2005 2219 2006 2757 2007 3305 Source: International Telecommunication Union (2009b) More specifically, Asia hosts 709 million of the world‘s mobile phone subscribers, compared to 573 million in Europe, 373 million in the Americas, 77 million in Africa, and 20 million in Oceania (ITU, 2009a). In its distribution, the mobile phone exists not only in the developed countries but also in developing countries where numbers of subscribers are surpassing fixed-line customers (Glotz, Bertschi, & Locke, 2005). Mobile phone subscriptions in developing countries flourish mainly because the technology is able to overcome the problem of developing countries' lack of fixed telephone infrastructure while demand for the service keeps increasing. Indonesia is one of those developing countries, where multiple populations are benefiting from the availability of mobile phones. Indonesians benefit not only because they do not have access to land line telephones but also because they are able to take advantage of mobile phone‘s social and psychological benefits. According to Vincent (2005), mobile phones help people maintain their relationships with family and friends. Considering those two factors, this study examines the family behavior of Indonesian overseas migrant workers (OMWs), an illustrative social setting wherein participants benefit from mobile phone adoption. The purpose of the study is to better understand the social-cultural and economic phenomena that occur in the OMW families as the result of the presence of mobile phones. RESEARCH METHODS AND STUDY AREA 321 We conducted this research from December 8 to December 28, 2008. During this time, we visited the Kecopokan hamlet in the southern part of Malang, East Java province, Indonesia. Kecopokan, along with Krajan and Ngrancah, is one of the hamlets in Senggreng village known to have individuals who work as OMWs. Kecopokan can be reached from Malang by a 40-minute minibus ride, followed by a 10-minute ride on an ojeg, a motorcycle used as a taxi. Transportation service from Malang to the hamlet is available daily and costs around US$ 2 for one round trip. Although a bad road connects Kecopokan and the main road and there is no landline telephone infrastructure, there are some mobile phone signal towers in the vicinity of the hamlet, so it is well-covered by a mobile phone network. To gain the data that we needed, we spent most of our research period visiting Kecopokan to talk to residents. We spent a few days early on visiting the village office to get consent from the village officials and to collect general data about the hamlet and its people. Unfortunately, we were not able to actually live in the village, though that probably would have given us a chance to gain more data. Hammersley and Atkinson (1983) explain that ―ethnographers participate, overtly or covertly, in people's daily lives for an extended period of time, watching what happens, listening to what is said, asking questions.‖ An ethnographer‘s main goal is to observe human interactions in social settings and activities. Therefore, in this research, using an ethnographic approach, we tried to understand people‘s interactions with their mobile phones within the existing social setting in order to find out what implications are resulted in that interaction. Due to our inability to stay in the hamlet, our method involved conducting a series of visits to carry out unstructured and semi-structured interviews with several adult individuals. Russell (1999) argues that a semi-structured interview is very reliable in ethnography to gain in-depth data. Thus, due to the time limitations that we faced in conducting the research and our wish to collect as much data as possible, we mainly used semi-structured interviews during our two first weeks in Kecopokan. Interviews were conducted primarily in homes of the families of overseas migrant workers, except for the interviews with village officials which were held in the village office. We did not have any preferences about time and situations for interviews, but since we were not able to stay in the hamlet, interviews were mostly conducted during the daytime. One benefit of the unstructured interview is that it is informal and makes people feel comfortable. The interview can only be done if the participants and the interviewers feel comfortable with each other. We and our participants obviously needed time to get to know each other and build trust. Therefore, we used the unstructured interviews during our last week in the hamlet. The interviews were spontaneous, involving no specific questions, and similar to any light conversation. Sometimes the interviews took place even while we were enjoying lunch or sitting by the nearby river. We allowed our research participants to talk freely rather than limiting them to interaction with our list of questions. 322 To record the information that our participants delivered, we mostly depended on our recorder and notebook. The combination of those two tools helped us to note what our participants implicitly and explicitly wanted to say. We mostly communicated with our participants directly using Indonesian, the national language. However, when it seemed that our recipients felt more comfortable if we used the local Javanese language (Boso Jowo), we used that language. Finally, but importantly, this research was supported by historical data to provide a background of Indonesia's history of overseas migrant employment along with information about the country‘s telecommunication sector. A separate discussion about the use of remittances in Indonesia and the mobile phone‘s impact on the society has been used to elucidate this research. The literature study was carried out using resources obtained from Alden Library at Ohio University. STUDY AREA a. The physical setting Senggreng village is located in Malang, East Java province, Indonesia. It is about 30 kilometers south of Malang city. The village covers 584,520 hectares of land, comprising the three hamlets of Kecopokan, Krajan, and Ngrancah. Senggreng is bordered by Ngebruk village to the north, the Brantas River to the south, on the west by Sambigede village, and on the south Trenyang village. Kecopokan, the place where we did our research, is in the southern part of Senggreng, bordered by the Brantas River. The river is the main water supply for the nearby Java – Bali hydroelectric power plant located at Sutami Dam in Karangkates village. MAP 1 RESEARCH SITE AS SEEN IN MALANG CITY MAP SOURCE: ATLAS, JAWA TIMUR (2004) 323 Geographically, Senggreng is a lowland area 297 meters above sea level with an average temperature of 23 – 32 C o . The climate is generally dry, with heavy rains in December through March, and long dry seasons with several light rains during the remaining months of the year. The annual rainfall averages above 200 mm with very little variation. The Senggreng village area is generally fertile and has decent agricultural potential. PHOTO 1 ENTRANCE TO SENGGRENG VILLAGE 324 PHOTO 2 ENTRANCE TO KECOPOKAN HAMLET b. Population In 2008, Senggreng village had a population of 8,933 people, which was composed of 4,707 males and 4,226 females. The original inhabitants of this village were Javanese, with later immigrants from the island of Madura. People in Senggreng are mainly engaged in agricultural activities. However, since the land in the village is owned by several rich people, most of the farmers are sharecroppers, though fish cultivation on the Brantas River offers hope and expectations of additional employment. Fish cultivated in the river are sold at markets in Malang and Blitar. Some men in the area have motorcycles and can make a living providing taxi service. In Senggreng, as elsewhere, television has proved to be the mass communication technology most familiar to the population. Currently, there are 1,471 television sets owned by individuals, and the one in the village public hall is available to everyone. On average, there is one television for every six villagers. This figure contrasts with the number of landline telephones in the village: only 129 wired phones are owned by individuals with no public 325 telephone available. This averages one telephone for every 70 villagers. Unfortunately, there is no exact data about the number of mobile phones owned by the village residents. While by the end of 2008 the three largest Indonesian mobile phone service providers have had about 108 million subscribers, it is likely that mobile phones probably also constitute a high level of use in Senggreng. It is undoubtedly time for the village officials to conduct data gathering (similar to the data they have for television and landline telephone) to determine the significance of mobile phone technology in the village. In addition to the country‘s overall statistical data, one clear indication of how fast the mobile phone has entered the village is that almost all of the village officials themselves have at least one mobile phone each. RESEARCH PARTICIPANTS c.1. Mr. Paujianto and Mrs. Sriatun Mrs. Sriatun started working as a Tenaga Kerja Wanita, the common name for female OMWs, in 1989 in Saudi Arabia. She was inspired to work overseas by her neighbor, Mrs. Poniyah, known as the first Kecopokan citizen who worked abroad in Saudi Arabia. Mrs. Sriatun believed that by taking the same path that Mrs. Poniyah took, she would be able to make her life condition better, something that would have been impossible to achieve if she kept staying in the village. After four years working in Saudi Arabia, Mrs. Sriatun decided to return to Indonesia and work as a farmer. She married Mr. Paujianto in 1998, but realized that her family‘s need for money kept increasing. So, in 2001 she decided to go to Hong Kong to take up her old occupation as a pembantu or domestic worker again. Mrs. Sriatun sent most of her wages back to her family in Senggreng. PHOTO 3 MRS. SRIATUN IN PRESENT DAY 326 PHOTO 4 MR. PAUJIANTO’S FAMILY Though she was single when she worked in Saudi Arabia, while working in Hong Kong Mrs. Sriatun had a husband and a two-year-old son about whom she wanted news. For the first 12 months she was away, she contacted her family primarily through letters. This process could take up to a month, or she could communicate through friends who went home for visits. Back then, telephones were rare in Mrs. Sriatun‘s hamlet. Only rich people could afford the installation fee. Mr. Paujianto had to borrow a telephone from his rich neighbors or relatives; the date and the time of the call had to be arranged in advance. In 2002, Mrs. Sriatun decided that she and her husband should each own mobile phones. That way, they could communicate frequently. She bought two mobile phones in Hong Kong. The first, a Samsung SGHX-200, cost her around US$ 125. The second phone, a Nokia 2100, cost around US$ 147.72 (based on Rupiah exchange rates to US Dollar in May 2002 informed by the World Bank, Rp 8,800 = US$ 1). Mrs. Sriatun then asked a neighbor who was also working in Hong Kong to take the Nokia mobile phone to Mr. Paujianto when the neighbor went back to Indonesia, and once Mr. Paujianto received the device, all he needed to do every month was to buy the credit voucher. With the mobile phone, contact between Mrs. Sriatun and her family became faster and more frequent. 327 c.2. Mr. Karijono and Mrs. Nawiyah In Mr. Karijono‘s family, the OMW was his daughter, Ms. Luluk Dewi Maslukah. She worked in Hong Kong from 2002 to 2004 and then moved to Singapore, where she still is. During her six years abroad, Ms. Luluk worked mainly as a baby sitter. Although Mr. Karijono, as the head of the family, is still actively working at Malang University and receives monthly wages, Ms. Luluk, like other OMWs, never forgets to send back some of her wages to help her family meet their needs. In fact, Ms. Luluk now is partially supporting the school fees of her younger brother, Opik. PHOTO 5 MS. LULUK IN SINGAPORE When Ms. Luluk was still in Hong Kong, Mr. Karijono maintained communication with his daughter by letter with all of its limitations. But since she started to work in Singapore, Mr. Karijono and Ms. Luluk have communicated principally via mobile phones. Communication before they started using mobile phones was not easy. Although Mr. Karjiono and Mrs. Nawiyah‘s desire for a mobile phone was high, it only happened when Ms. Luluk sent one home. She sent a Motorola mobile phone to Indonesia so she could call her family and talk with them when she liked. Mr. Karjiono was hestitant to buy a mobile phone which he perceived to be a luxury that he could not afford. PHOTO 6 MRS. NAWIYAH AND MR. KARIJONO 328 In communicating, Ms. Luluk and her family used both voice and text messaging services. Since Ms. Luluk preferred actual conversations rather than sending text messages, once Mr. Karijono even decided to buy a CDMA mobile phone because based on what he saw in commercials he believed that it was going to be cheaper for her to call to CDMA mobile phone. Ms. Luluk sent text messages as well as called the family‘s wireless fixed line mobile phone almost every day. However, for conversations that were longer than an hour, she called once every three days. She called when she took her boss‘s child to the park or during her off time. Mr. Karijono said that whenever his daughter calls, it seems impossible to end the conversation. This is true because the mobile phone for them is really engaging. It was a partial cure for the family‘s longing for each other because it has been four years since Ms. Luluk left to work abroad. c.3. Mr. Subari Mr. Subari was working as the head of the Kecopokan hamlet as well as fish cultivation businessman. His wife was an OMW who worked in Hong Kong. Mr. Subari told us that he used to be a migrant worker too, but more like a domestic one. Working for plantation sites for several years, he went from one island to another in Indonesia. In his capacity as the head of the Kecopokan, Mr. Subari helped us a lot in finding statistical data about the Senggreng village as well as Kecopokan. PHOTO 7 MR. SUBARI 329 Mr. Subari believed that mobile phone has become important for him for at least in three different reasons. First, it was the device that enables him to stay in touch with his wife in Hong Kong. Second, mobile phone helped him to coordinate with his fellow workers both in the village office and in the fish cultivation business. Third, mobile phone assisted Mr. Subari to be connected to the market as well as to his investors so he could effectively run his fish cultivation business. DISCUSSION On a different scale, remittances sent back by Indonesian OMWs have been contributing to the country, to provinces, and to households. Among those three, remittances have a significant effect on households. Few OMW families use the remittances to increase household productivity, but, their expenditure patterns are still reasonable in the sense that they know they have to prioritize their primary needs. First of all, they buy their subsistence supplies; if there is any money left, they use it for luxury goods that apparently open the way to modernization. Nowadays, among other modern luxury goods in the market, one purchase that is likely to be present in most OMW families is the mobile phone. As the OMW families are exposed to the technology, the mobile phone impacts those who decided to obtain and use it. The mobile phone currently has a broader function than just as a device for voice calls. It has become a part of people‘s culture that helps them to find new ways of living. To improve their meager family incomes, people from Kecopokan, especially the women, have worked overseas since the middle of the 1980s. They were mainly sent to Saudi Arabia to work as housemaids or domestic workers. During the 1990s, the number of migrant workers gradually increased. Labor brokers arranged work for them in various destinations such as Malaysia, Hong Kong, Singapore, South Korea and Taiwan. The remittances that were sent home were used to cover subsistence needs such as food, shelter, and school fees. Although there have been various development programs in the hamlet of Kecopokan, including electrification projects, neither telephone landlines nor decent road access exists in 330 the area. As an example, between 2005 and 2006, whenever Mr. Karijono asked Perseroan Terbatas Telkom – Perseroan Terbatas is a company owned by two or more people with its capital comes from stoke – (PT. Telkom) in Malang about the availability of new landline telephone service, the company always told him that their stocks were empty. Further, as Mr. Karijono explained, there used to be several landline telephone poles in the village, including in Kecopokan. After PT. Telkom apparently abandoned those poles, several teenagers dismantled and sold them. Initiated mostly by the overseas migrant workers, mobile phones have become a revolutionary new means for families to communicate with their overseas breadwinners. As expected, the presence of mobile phones and their complementary equipment in Kecopokan were increasingly common in the community. Based on the information that we got from our participants, it was primarily the OMWs who bought the devices in the countries where they were working. They were the ones who knew what type of mobile phone they should buy whereas their families had no idea, and there were few people in the hamlet who could give advice about it. The OMWs, on the other hand, were able to discuss the matter with their fellow workers and their bosses. With the assistance of neighbors or friends who were returning home, the OMWs sent the purchased mobile phones to their families. PHOTO 8 A GUARDHOUSE PAINTED WITH CELLULAR SERVICE PROVIDER ADVERTISEMENT Remittances received by the OMW families were then used to regularly purchase the credit vouchers in order to maintain the services. Mostly, the families would allocate US$ 5 or US$ 10 to buying the vouchers. US$ 5 worth of credit would give about a month's worth of service. Most of the OMW families saw purchasing the credit as a burden yet an important thing to do. It was a burden since they had to regularly spend a sizeable amount of money which could otherwise be used to fulfill the family‘s substantial needs, but it was also impossible for the family to ignore continuation of the mobile phone service since they were growing dependent on it. PHOTO 9 A MOTORCYCLE REPAIRING SHOP WITH CELLULAR SERVICE PROVIDER ADVERTISEMENT 331 Donner (2005) states that the mobile phone has the potential to give economic and social benefits. Indeed, our research found that as the people in Kecopokan became familiar with using mobile phones, they became attached to them. The interaction between people and mobile phones has some social-cultural and economic implications as can be seen in the findings below: A. Social-cultural implications a. Families are able to maintain relationships with their relatives abroad (and within Indonesia) with the use of mobile phones. Kecopokan hamlet is among the many rural areas in Indonesia that have not been equipped with landline telephone infrastructures. Thus, the families of OMWs in the hamlet had no choice but rely on the time-consuming process of mailing letters and the rare access to landline telephones if they wanted news of their family members abroad. Mr. Paujianto and Mr. Karijono, for example, each had to deal with the fact that it was hard to get telecommunication access and, consequently, had difficulty maintaining relationships with their wife and daughter respectively. Mr. Paujianto said that, in the past, sometimes he felt that ―he had no wife.‖ When a problem occurred in the family and it was hard for him to communicate with Mrs. Sriatun, he felt he had nobody with whom to share the problem, to talk to, or to help him to find a solution. Further, although Mr. Paujianto knew very well that his wife was working hard earning money for the family, sometimes he still felt that it was only he who had to take care of the family. When he or their son needed extra money, Mr. Paujianto sometimes still ended up borrowing money from neighbors or relatives because he could not request it from Mrs. Sriatun because it was so hard to contact her. Without good communication, Mr. Paujianto‘s relationship with Mrs. Sriatun became troubled. 332 Mr. Karijono, likewise, was bothered when his daughter, Ms. Luluk, went abroad for the first time and he rarely received any news from her. Since Mr. Karijono and his wife considered their daughter an extrovert who always shared her stories with them, the lack of telecommunication services caused a misunderstanding. Mr. Karijono thought that his daughter had become distant. He thought that his daughter had changed and was not opening herself anymore to her parents, an accusation that proved to be wrong. Ms. Luluk apparently just could not maintain communication because the ways were limited. Mailed letters sometimes went missing during the delivery process, and as a new worker, she spent most of her time learning about her job. In regard to the above two relationship problems, the mobile phone became a partial solution. We found that there are two reasons why the OMWs and their families think that mobile phones help them to maintain their relationships. First, the mobile phone gives them access when their families need them. With a mobile phone, Mrs. Sriatun is reassured that whenever her family needs her, in her position as breadwinner and as wife, she can easily be contacted. Mr. Paujianto responded positively to the change, as he believed that the mobile phone has assisted Mrs. Sriatun to maintain her role as a wife. Second, mobile phones help to ensure continuous communication which in the end also helps OMWs and their families maintain their relationships. In using mobile phone communication, Mr. Karijono realized that nothing had changed in his daughter‘s personality; she was still assertive. Whenever Ms. Luluk called they spent hours talking on the mobile phone. Mr. Karijono even said that it is hard to stop his daughter when she starts to talk, something he is really thankful about. Mr. Karijono was also relieved that he could update the news of other member of the family to Ms. Luluk. One positive effect of their good communication is that Mr. Karijono agreed to Ms. Luluk‘s request to stay longer in Singapore. As he believed that the mobile phone would ensure communication between them, he allowed Ms. Luluk to extend her contract that in December 2008, had reached its fourth consecutive year. Hjorth (2005) argued that mobile phones were mostly used to maintain the already existing relations rather than to establish new ones. The above two anecdotes obviously affirmed Hjorth‘s opinion. Further, regarding the above problems, it seems that the mobile phone‘s role in maintaining relationships between OWMs and their families is definitely the most noticeable and may be the most important application of the technology. In Mr. Paujianto‘s story about Mrs. Sriatun, having a mobile phone seemed to have a positive impact on their cross-border marital relations, as he felt her presence. In Mr. Karijono‘s story about Ms. Luluk, the mobile phone improved their cross-border parental relations, as Mr. Karijono felt Ms. Luluk‘s affection. In addition, the spillover effect of the existence of mobile phone in the OMW families is also apparent at the domestic level. By using mobile phones, the OMW families are able to reestablish and maintain their relationships with relatives and families in different cities, and even provinces. Before the mobile phones, they did not know each other‘s news since they could not visit. With the device, although they are still not visiting each other due to the distance and cost, at least they can regularly communicate. 333 b. Mobile phones have become a tool for parenting children. As mobile phones have become ubiquitous, they have also become tools of control for individual users and for larger social institutions (Bell, 2005). In the context of the OMWs‘ families in Kecopokan, we will discuss the mobile phone as a means of control for individual users. Our participants told us that in using their mobile telephones, their feelings were firmly attached to the information delivered via those phones. To know the condition of their beloved family member working abroad, for example, the OMW families depended heavily on communication via this device. They believed that the same thing was true for the OMWs. Based on the strong feelings that the OMWs and their families are able to develop, both sides seemed to agree on one positive function that mobile phones have for them. Remote parenting could be done using the mobile phone. Mrs. Sriatun told us that when she was working in Hong Kong, her mobile phone enabled her to communicate continuously with her son with the help of Mr. Paujianto. Through daily text messages (Indonesians tend to use the term SMS, an abbreviation of Short Message Services, to describe text messages and routinely calls) Mrs. Sriatun was able to ask her son about his school, to remind him about the importance of praying and reciting Al-Quran, and to deliver some advice about how important it is to be a good son. She was grateful that she could maintain her role as a mother although she was separated by great geographical distance from her son. Mr. Karijono, on the other hand, used to feel that he had failed to look after the only daughter among his three children and used to regret his decision to allow her to work as an OMW. Whenever he read news about mistreatment cases encountered by Indonesian OMWs, he felt that he has failed as a father. However, since he and his daughter decided to use mobile phones, Mr. Karijono felt that at least as a father he could be better informed about his daughter's situation and regularly give her advice about what she should be aware of based on the news that he read. In this sense, the information being sent from Indonesia had empowered the OMW. Ms. Luluk was less isolated and more alert to potential problems of abuse that could be done by brokers as well as employers. Mr. Nawiyah was also delighted that the mobile phone had allowed her to take her role as a mother in terms of teaching Ms. Luluk how to cook. Since Ms. Luluk was working as a baby sitter, her main skills gained from her training program related to taking care of children. Ms. Luluk could not really cook, but Ms. Nawiyah believed that a woman, in relation to her role as a wife and a mother, must be able to cook. Mrs. Nawiyah believed that it is her obligation to make sure that Ms. Luluk can cook so in the future she will be well-prepared for marriage. c. Text messaging on mobile phones often replaces more direct forms of communication such as conversation and discussion. 334 ―For at least one and a half million years, until about ten thousand years ago, human communication was invariably face-to-face, restricted to communication among people inhabiting a common physical space‖ (Nyiri, 2005, p. 161). As letters, telegraph, radio, television, landline telephones, and computer technology have taken their role in improving people‘s means of communication, ending the face-to-face necessity, the mobile phone has also made an exponential share in the improvement. One of the features the mobile phone offers to its users is text messaging. With this relatively cheap function, people are replacing face-to-face communication and more direct form of communication such as conversation and discussion with short form electronic writing. During my research, some participants were actively using the text message features on their mobile phones, illustrating of how OMWs‘ families replaced direct communication with texting. One day, as we visited Mr. Karijono‘s house to talk to his wife, we found Mr. Karijono himself was at home. He told us that he was not feeling well and decided not to go to office. When we asked him how he would tell his boss about his absence, Mr. Karijono said he had already sent a text message to his boss. When we asked him why he did not just call his boss, Mr. Karijono said to us that, in this matter, he thought that a text message was a better option for several reasons. Text messages, according to Mr. Karijono, provides some kind of ―proof‖ of him informing about his condition using the sent message in the outbox feature, just like a letter. He felt that by sending text messages rather than calling his boss, he was actually taking the polite way of communicating. He argued that if he chose the option to call, he would seem to be demanding that his boss pick up his call, regardless of what his boss was doing at that time. By using a text messages, he believed that he gave his boss the option of reading and responding at his convenience. Further, he felt that if he explained his absence verbally, he might end up using inappropriate words since the communication is direct. By using text messages, he could choose the appropriate wording before he sent it. Thus, Mr. Karijono believed that a text message is a better way to communicate in his subordinate to superior relationship with his boss. Mr. Subari provides a different example of a person who considered text messages as an alternative to direct communication. It all started when he decided to buy a mobile phone that he could dedicate only to working matters. The new mobile phone gave him instant access when he needed to coordinate with the kepala desa (head of the village) and his fellow workers. Lasen (as cited in Lan, 2006, p. 179) stated that ―SMS not only facilitate communication on a person-to-person basis but also provides a broadcasting tool for rapid, wide, and cheap distribution of public information.‖ Thus, any time Mr. Subari wanted to communicate with his fellow workers regarding working matters, he needed only to type a brief text messages, choose the ―send it to many‖ option, and his text messages would automatically go to the intended people. By using text messages, no papers were needed and there was obviously less bureaucracy. 335 d. Mobile phones can be a disruptive technology for an individual and a social setting. Haddon (2005) states that various studies have shown that mobile phones can be disruptive for people in public spaces. In our research we found that the OMWs‘ families in Kecopokan who owned mobile phones and the hamlet society, overall, apparently could not avoid disruption as a result of the technology. Mobile phones, from one perspective, are considered a technology that breaks down time and space constraints, connecting people in different times and places. Its handy characteristic (To indicate its handy characteristic, in Indonesia, Korea, as well as several other countries in the world, a mobile phone is called ‗Hand Phone) unconsciously ‗forced‘ users to have it close to them whenever and wherever they go. However, since a caller can reach a mobile phone number directly to its owner in any given place and time zone, incoming calls can disrupt a situation that already exists. Thus, during family time, prayer time, rest time, and other important moments, a mobile phone call can be unwelcome. Mr. Karijono said he hates to deal with a very late night or very early morning call from his office, asking him work-related things, as if the matter could not be handled during office hours. Additionally, most of our participants also felt annoyed when someone called them during the Maghrib time. They are bothered by how people can be so ignorant as to call during a time widely understand to be set aside for prayer (Different from other times of prayer, during Maghrib most Indonesians will try to pray together with their family at home or with others in the mosque). Bell (2005) explained that, in Indonesia, many people obtain two mobile phones, each for a different purpose. One is usually dedicated for work and the other for social life. The motivation behind this practice is clear: they want to have a separation between their private and public lives, limiting the disruptions that might occur. Mr. Karijono falls into the category of Indonesians mentioned by Bell. He had one GSM mobile phone, with GSM cards from two different service providers, and one CDMA mobile phone. In his mobile phone usage, Mr. Karijono wanted to separate his private and public lives, which later helped him to solve the disruption problem. When he only had one GSM card, Mr. Karijono always left his mobile phone on (except when he was sleeping), so his daughter could call him from Hong Kong whenever she wanted. Unfortunately, this decision had unpleasant results since people in his office could access him just as readily. When Mr. Karijono decided to buy another GSM card and even a different mobile phone, he could manage which phone should be turned on or off. After work, he changed his office contact card number with the other one. With that strategy, he could cut the telephone access from his office while still having a connection for his daughter. Another disruptive aspect of mobile phone technology is related to its multimedia capability which allows owners to store illustrations and videos in the device. The problem can occur when underage children use mobile phones to store porn illustrations and videos. Thus, 336 parents are becoming worried about what their children are storing in their mobile phones. Mrs. Nawiyah, for instance, always asked Mr. Karijono to check regularly their son‘s mobile phone just to make sure that he is not storing any hurtful material. The mobile phone has proved its disruptive potential not only to individuals but also in broader social settings. We found during our research that mobile phones are considered a nuisance in a mosque. Remaja masjid (custodians) at several mosques in Kecopokan and the other two hamlets observed in this research have posted signs asking that mobile phones be turned off (see Illustration 3.3). As one remaja masjid said, ―Often, people forget to turn off their mobile phones and they suddenly ring in the middle of the sermon, prayers, or Al-Quran recitals. The sound disrupts other people‘s contemplation.‖ Although the posting of the sign has reduced the nuisance factor of mobile phones, unfortunately, sometimes people still forget to turn off or silence their mobile phones, so the remaja masjid decided just to leave the sign permanently up. PHOTO 10 A SIGN IN BAHASA INDONESIA THAT IN ENGLISH MEANS ―PLEASE TURN OFF YOUR MOBILE PHONES INSIDE THE MOSQUE‖ A different example of how mobile phone can be disruptive for society is illustrated by a case that happened in 2008. In many areas of Indonesia, people were frightened about the phenomenon of SMS santet or black magic text messages. The rumor spread across the country that a text message received from numbers starting with 0866 and 0666 could turn the cell phone's screen red and kill the person who received it. This issue, concerning mobile phone usage, caused some civic concerns. Mr. Karijono explained that the issue also made several people in Kecopokan uneasy, especially since the mass media were blowing it up. Although the issue did not affect hamlet security, people were making some adjustments regarding their mobile phone practices. Mr. Subari, for instance, asked his family members to turn-off their mobile phones after maghrib. Mr. Karijono asked Ms. Luluk to change her call schedule to earlier in the day. 337 e. Mobile phones have become a symbol of newfound wealth and a perceived way to acquire higher social status. There is a distinctive factor that differentiates Kecopokan and other hamlets in Senggreng village. That factor is housing. Based on our observation, several houses in Kecopokan stand out from others in the village. Mr. Subari told us that those beautiful houses are generally owned by the OMWs in the area. For OMWs, a house is the greatest symbol of the newfound wealth. It is a symbol of their success in working abroad, their achievement after having sacrificed precious time that they could have spent with their families. Other factors that Mr. Subari believed OMWs use to symbolize their newfound wealth are motorcycles and the newest one, the mobile phone. Lan (2006) explained that OMWs consider consumption as an important way to express themselves and marked their identity. As an item that can be easily displayed, the purchase of a mobile phone becomes a medium for migrant workers and their families in showing off their spending power. Mobile phones slowly but surely have become one of the symbols of OMW‘s newfound wealth. Although the price of a mobile phone is well below that of a motorcycle and far less than the total price of a house, it is still considered a prestigious item. This is because, in its early presence in the village, mobile phones followed a pattern similar to that of expensive houses and motorcycles-- mobile phones were owned only by people with high status. Simply put, the status itself was mainly related to a person‘s wealth: the richer a man is, the higher his status. When an OMW‘s family received a mobile phone sent by their breadwinner abroad or when they decided to buy it using the remittances, the neighbors assumed there had been an improvement in their economic condition. If that family had previously been considered poor, after acquisition of a mobile phone, that status would likely change. Without taking the actual economic condition of the family into consideration (since the mobile phone is more visible than the family‘s actual financial condition), the neighbors will regard the family as occupying a higher status. Thus, owning a mobile phone has become perceived as a way to acquire higher social status. f. As mobile phones have become a new household necessity, people are learning how to creatively manipulate the service to make it affordable. Peters & Hulme (as cited in Katz, 2005, p. 173) stated that users consider the mobile phone more than just a material object; it is an extension of the self. If they lose their mobile phones, it is like losing one of their physical parts. OMWs‘ families indeed consider mobile phones to be important parts of themselves. As Mr. Karijono told us, without the mobile phone he could not imagine how he could maintain good communication with his daughter. Mr. Subari 338 argued that if he went to work without his mobile phone, he would have a strong sense that something was missing. As the families of OMWs in Kecopokan realized that they had become attached to their mobile phones, they also found that they had to maintain not only the device but also the service that they need. To ensure that they can always use the service, they have to buy GSM or CDMA phone credits. The voucher credits are sold almost everywhere in the country for various systems and at various prices. The credit availability in Indonesia is not an issue but the ability to purchase the credit is. Donner's (2005) shows how the use of mobile phones in poor areas is different than that in more prosperous settings. He illustrated how mobile phone use differs from one society to another. In our field research we found that there are several types of mobile phone usage in Kecopokan that may differentiate the people of Kecopokan from wealthier outsider, while, in fact, representing the use of mobile phone for poor people. In terms of the phone device, we found that as each person in the family of a Kecopokan OMW realized how useful it is to own a mobile phone, each wanted his or her own phone even when the family could not afford to buy more than one. To deal with this, Mr. Paujianto‘s family all agreed to share not only the mobile phone but the number as well. Bell (2005) explains that although the dominant model of mobile phone ownership seems to be at an individual level, it was also the case that among many households, people shared mobile phone; parents, children, siblings, spouses, and members of an extended household jointly used one mobile phone. In terms of the phone services, we found out that the families of OMWs have found several ways to reduce their expenses. For domestic communication, OMWs families prefered to use text messages rather than direct calling because it is much cheaper. In fact, in some situations, users have made the communication free by having an agreement of missed calls. One example is the agreement Mr. Paujianto has with Mrs. Sriatun regarding what she should do when she gets to the village: ―When you have arrived at the village market, just give me a missed call so I know when to pick you up. Thus you don't need to pay to use the ojeg.‖ By having this kind of agreement Mr. Paujianto and Mrs. Sriatun have save money in two different ways; the ojeg cost and telecommunication cost. g. Mobile phone has become a medium for the transfer of knowledge. It seems that by working overseas, Mr. Sriatun, as well as other OMWs, had a better opportunity to become familiar with communication technology. At first, Mr. Paujianto absolutely did not know how to use mobile phone. With the help of Mrs. Sriatun, Mr. Paujianto who once was only able to receive calls and open text messages was at last able to call and sent text messages back to Mrs. Sriatun. In fact, from the instruction that he got from Mrs. Sriatun, Mr. Paujianto was able to use other features from the mobile phone such as the 339 alarm and the phone book. In other words, there was a transfer of knowledge process from Mrs. Sriatun to Mr. Paujianto with the mobile phone as its medium. B. ECONOMIC IMPLICATIONS People are able to increase their income by using mobile phones The services that the mobile phone technology offers come at a significant price. Most OMWs and their families spend a considerable amount of money on phone calls and text messaging to fulfill their desire for communication. However, based on my observation, the OMW families‘ decision to maintain mobile phone services increased rather than decreased their earnings. At first, it was hard to believe; yet we learned that it is actually true that mobile phones have helped the OMW families in Kecopokan to increase their income. We managed to find several pieces of evidence related to that matter. In some cases, as Mr. Subari explained, when an OMW comes home because his or her contract has expired, the family will sell its‘ mobile phones. As they are together again, they feel they need the money more than they need telecommunication tools. Mr. Paujianto and Mrs. Sriatun took a different approach. Instead of selling both of their mobile phones, they maintained only one. Though voucher credit is an expensive obligation every month, Mr. Paujianto told us that his mobile phone had helped him to find extra jobs, which means more income to augment his wages as a sharecropper. He used the phone to work as a broker and middleman, offering to facilitate getting commodities people need, such as buying a goat for a thanksgiving ceremony, materials for building a house, and related work. Mr. Subari had his own way of reaping the benefits of mobile phone ownership for the sake of his fish cultivation business. Since the boom in fish cultivation began in the village, people who own shares in the business have used mobile phones to find more capital to expand the business. Mr. Subari and other fish farmers use mobile phones to solicit capital from their relatives working overseas and then use the same device to report progress to their investors. Although he is managing five different fish cultivation groups, Mr. Subari‘s main profession is head of Kecopokan hamlet. His mobile phone has allowed him to efficiently and effectively coordinate the fish cultivation endeavor while he is at the village office or even at home. According to Mr. Subari, there are also OMWs who benefit from mobile phones not for communication but as a market commodity. One of his friends working in Saudi Arabia once brought back 10 Nokia 6600 mobile phones which he then sold for a tidy profit since they 340 were much cheaper in Saudi Arabia than in Indonesia. Further, the mobile phone is a communication tool with various additions, some of which must be used while others are optional. It seems that the growing presence of mobile phones in the village has created a supplementary market of vendors that sold such items as ringtones, wallpaper, lanyards, batteries, and credit vouchers. Mobile phones assist information exchange in a way that benefits the families of OMWs. With a mobile phone, information exchange is possible at any distance, and since such devices are mostly always with their owners, the information generally reaches the appropriate person. In managing his fish cultivation business, Mr. Subari explained that his mobile phone has helped him to exchange information on commodity prices and market behavior in comparison to other areas. Thus, he and other fishermen can stay in touch with markets to know which is offering the most profitable price. Additionally, by acquiring this knowledge by using a mobile phone, Mr. Subari has reduced his operational costs by cutting out unnecessary travel. Other examples of how the mobile phone assists information exchange can be observed from these several narratives. Using mobile phones made it easy for Ms. Luluk and Mrs. Sriatun to send the remittance registration numbers to their families so they could easily pick up the remittances at the post office. As her mobile phone helps Mrs. Sriatun keep in touch with her former employers in Hong Kong, she was the first person to learn they had a position open. After a series of communications, Mrs. Sriatun‘s sister, Mrs. Srianti, was offered a chance to try the job. Mobile Phones in Kecopokan The recent remarkable growth in the use of mobile phones throughout Indonesia has not included everyone. People in rural areas are less likely than urban dwellers to be connected. The majority of the rural population is still unable to gain access to digital technology, experiencing the digital divide (―The digital divide refers to the separation between those who have access to digital information and communications technology and those who do not‖ (Dewan & Riggins, 2005)). However, the OMW families in Kecopokan were among the rural folk who were able to access the technology and then bridge the digital divide. During the period of our research, the mobile phone and its services were quickly becoming affordable for the OMW families who had increased income from remittances and who found mobile phone to be an important means in maintaining contact and accessible tool to improve their lives. In practical consideration, the device was rapidly becoming adopted because no special knowledge is necessary in order to use it; this advance technology could be employed easily. 341 Drawing from our findings of the possible consequences that mobile phones have created for the OMW families, it seems that the OMW families in Kecopokan were able to make use of mobile phone both as a product and as a driver of social and economic development. As reflected in the topics that the OMWs and their families usually mentioned, the voice or data exchanges mediated by the mobile phone have been social, economic, or a combination of both. Thus, apart from the various motives for communicating with the mobile phone, for social relations that have productive benefits are created as the OMW families and their breadwinners abroad were able to communicate freely, continuously, and profoundly. Those productive benefits include how mobile phones have created economic opportunities for Mr. Paujianto with his job as a middleman, Mr. Subari with his idea of soliciting capital for his fish cultivation business, the establishment of vendors who sold mobile phone accessories and credit vouchers, and even service providers‘ massive advertisement. Thus, mobile phones connected people in their roles as producers, distributors, and consumers. As the number of mobile users grows, the economic productivity will likely increase. Additionally, despite their being separated by great distances, Mr. Paujianto maintained her connubial relationship with Mrs. Sriatun and Mr. Karijono his parental relationship with Ms. Luluk via mobile phones. Thus, these devices connected people in their positions as husband, wife, parent, and child. As the mobile phone function enhanced, it also strengthened the social network between OMWs and their families. The above explanation shows that the presence of mobile phones in the hamlet is really helpful. A further question that needs to be addressed is how the government responds to the mobile phones‘ ability to empower the people in the hamlet. How will the government react to the reality of the hamlet‘s people's ability and knowledge in overcoming the lack of infrastructure? By now, the government should be aware that although the hamlet was marginalized by the lack of landline telephone telecommunication infrastructure, the people of Kecopokan (represented by the OMW families) have been creatively dealing with the situation. The OMW families did not wait until the government set up landline telephone for them; they simply skipped the government by using mobile phones. With the success that the people of Kecopokan have shown, the government may come to realize that even the people in this peripheral area are willing to adopt mobile phone technology in order to integrate themselves with other people with better telecommunication access. Thus, in the case of the OMWs and their families, the government should be encouraged to develop a further service that facilitates those people with the medium of the mobile phone. In terms of remittances, for an example, working hand in hand with service providers, banks, and OMWs, the government I recommend that be more determined to implement a mobile banking program. With that service available, the money-transfer process would be more secure from extortion practices, and the government would be able to calculate the total amount of remittances being sent back to Indonesia. 342 CONCLUSIONS Many of the people of Kecopokan, especially the women, have decided to improve their livelihood beyond agriculture by working overseas as migrant workers. Remittances are the main motivation for this decision and have become the most important contributions of those OMWs to their households. Remittances being sent back to Kecopokan have helped OMW families to meet their daily needs. Another important role of remittances is to bring modernization to Kecopokan. Those funds are being used to purchase such necessary technologies as the mobile phone that have been absent from the hamlet. The fact that the overseas migrant workers (OMWs) have become agents of mobile phone penetration into Kecopokan hamlet is indisputable and was beyond our expectations. We had assumed that mobile phone purchases using the remittances mainly took place in Indonesia and we were wrong. Most of the mobile phones in the OMW families were purchased by OMWs in the country where they were working and were sent back to their families with the assistance of neighbors or friends who were coming home. The OMW families were mainly responsible for buying monthly credit vouchers to maintain the services. Although it was the OMWs who initiated the procurement, we found out that their families also showed great interest in acquiring the technology and the services. Although mobile phones are not a panacea for the poor telecommunication infrastructure, they have become a great resource for people of Kecopokan who want to break out of their insularity. At the time of our research, we noticed that the presence of mobile phones in Kecopokan had brought social-cultural and economic benefits, as well as some problems, to the society. Family ties are built and maintained on the many phone calls and text messages circulated across borders. In fact, when mothers become overseas migrant workers, they use mobile phones to parent their children. In terms of its intense usage, while text messaging has been perceived as a replacement of direct communication such as conversation and discussion, the unconstrained voice calls can be disrupting for an individual and even social groups. In relation to the OMWs consumption motive and pattern, mobile phones have become a symbol of newfound wealth, and a perceived way to acquire higher social status. Such phones have become a new household necessity, and people are learning how to creatively manipulate the system to make the service more affordable. With mobile phones, transfer of knowledge from OMWs to their families has become possible. People have also able to increase their incomes because mobile phones can be a tool for managing business as well as a commodity for trading. Last but not least, mobile phones assist information exchange in ways that can provide benefits to the OMW families. 343 Based on the above explanation about the mobile phone effects, despite the problems that it creates, the mobile phone has shown its ability to overcome the digital divide and empower the OMW families in a variety of ways. Since we believe that mobile phones will become more and more important in the future, it will be interesting to see how more isolated societies will deal with the effects of the presence of mobile phones. 344 REFERENCES Bell, G. (2005). The age of thumb: A cultural reading of mobile technologies from Asia. In S. Bertscht & P. Glotz (Eds.), Thumb culture: The meaning of mobile phones for society (pp. 67 – 87). New Brunswick: Transaction Publishers. Dewan, S. & Riggins, F. J. (2005). The digital divide: Current and future research directions. Journal of the Association for Information Systems. Retrieved July 10, 2009, from http://misrc.umn.edu/workingpapers/fullpapers/2005/0524_120605.pdf Donner, J. (2005). The social and economic implications of mobile telephony in Rwanda: An ownership/access typology. In P. Glotz, S. Bertschi, & C. Locke (Eds.), Thumb culture. The meaning of mobile phones for society. (pp. 37 – 51). Piscataway, NJ: transnational Publishers. Glotz, P., Bertschi, S., & Locke, C. (2005). Thumb culture. The meaning of mobile phones for society. Piscataway, NJ: transnational Publishers. Haddon, L. (2005). Communication problems. In S. Bertscht & P. 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Mobile communication and the transformation of daily life: The next phase of research and mobiles. In S. Bertscht & P. Glotz (Eds.), Thumb culture: The meaning of mobile phones for society (pp. 171 – 182). New Brunswick: Transaction Publishers. Lan, P. (2006). Global cinderellas: Migrant domestic and newly rich employers in Taiwan. London: Duke University Press. Nyiri, K. (2005). The mobile telephone as a return to unalienated communication. In S. Bertscht & P. Glotz (Eds.), Thumb culture: The meaning of mobile phones for society (pp. 161 – 169). New Brunswick: Transaction Publishers. Russell, B. H. (1999). Social research methods, qualitative and quantitative approaches. London: Sage Publications Inc. The World Bank. (2002). Indonesia. The World Bank. Retrieved July 30, 2009, from http://siteresources.worldbank.org/INTEAPHALFYEARLYUPDATE/Resources/550 192-1101496522788/indonesia.pdf. Vincent, J. (2005). Emotional attachment and mobile phones. In P. Glotz, S. Bertschi, & C. Locke (Eds.), Thumb culture. The meaning of mobile phones for society. (pp. 117 – 121). Piscataway, NJ: transnational Publishers. 345 THE EXTRINSIC CUES EFFECTS ON PERCEIVED PRODUCT SAFETY Lizar Alfansi, Magister Manajemen, University of Bengkulu, Indonesia
[email protected];
[email protected] Ferry Tema Atmaja, Magister Manajemen, University of Bengkulu, Indonesia
[email protected];
[email protected] Marthin Nanere, University of La Trobe, Bendigo, Australia
[email protected] ABSTRACT In the last five years, product safety has become a serious issue in Indonesia since media have revealed several cases of unsafe materials found in foods, drinks, drugs, and cosmetics in the market. Product safety can be explained by intrinsic and extrinsic cues of the product. The objective of the study is to examine the effects of extrinsic cues on product safety. The extrinsic cues employed in the study are price, brand, endorsers, promotion channels, distribution channels, product positioning, product certification, product life cycle, and county of origin of the product. The study was based on a sample of 367 consumers of cosmetics in the city of Bengkulu. The Wilcoxon Test and Friedman Test were employed to the dataset. The result of the analysis indicates that perceived product safety is significantly affected by all of the extrinsic cues. It is therefore important for marketers to design and position their products based on consumer perceptions of extrinsic cues of product safety. Keywords: Product safety, extrinsic cues, consumer attitudes. INTRODUCTION Issues on product safety of food, drinks, drugs, and cosmetics have recently been raised in Indonesian media. The use of harmful chemical products such as formalin, borax, and melamine, in the production of tofu, noodles, candies, and formula milks have been reported (www.pom.go.id). The use of such chemicals in food production is unsafe and could lead to vital organ (brain, lever, and kidney) failures. A press release from Indonesian Agency on Food and Drink Control (BPOM) in November 2008 revealed there were 27 cosmetics contaminated by mercury, Rhodamin B, and Retinoat acid that could lead to diseases related to kidney, lever, lung, cancer, diarrhea, and skin burn. In April 2009, the agency also found that a dried beef was mixed with pork and labeled as a pure beef product (www.pom.go.id). Although pork may not be categorized a dangerous food, in Muslim country like Indonesia, it is religiously forbidden and such practice is considered offensive. Consumer protection is indeed regulated by Republic of Indonesia Act No 8/1999. However, most people are skeptical since law enforcement in business ethics in the county is relatively 346 weak. The penalty that a company has to pay some times does not compensate financial, social, physical, and psychological risks that consumers have (Jacoby & Kaplan, 1974). The system of the drug and food control in the country is relatively poor. It does not fully protect consumers. Some consumers think that the product they buy might be harmful and unsafe. A segment of consumers who are sensitive to product safety could be a potential market to target. Siu & Wong (2002) stated that to attract customers who are sensitive to product safety issues, marketers need to have a better understanding of factors influencing customer perceptions of product safety. Studies on factors that influence consumer perceptions of product safety are relatively limited (Tse, 1999). Most previous studies on the subject reveal relationship between product-related factors and perceived product quality (Dodds, Monroe, & Grewal, 1991; Huntington, 1990). Some studies were focusing on issues of perceived product risks (Agrawal, 1995; Aqueveque, 2006; Hornibrook, McCarthy, & Fearne,. 2005). Other writers focused on product attributes (Cox 1967, Mitchell & Olson, 1981; Olson, 1972). Most studies were conducted in the U.S and European countries. Siu & Wong (2002) identified six product attributes which used by customers to evaluate product safety, namely price, brand familiarity, endorsement, distribution channels, promotion channels, and country of origin. However, the work of Siu & Wong (2002) ignore the importance of product certification, product life cycle stage, and a product positioning strategy, product attributes deemed important in consumer perceptions of product safety. Therefore it is the intention of the study to determine relationship between extrinsic factors and consumer perceptions of product safety in cosmetics industry. It is also the intention of the study to examine which extrinsic attributes that may appeal more to Indonesian women. LITERATURE REVIEW According to Cue Utilization Theory, a product has attributes that can be used to evaluate product quality (Cox, 1967; Olson, 1972). Olson (1972) categorized product attributes into extrinsic and intrinsic cues. Extrinsic cues are lower level cues that can be changed without changing the product, while intrinsic cues are higher-level cues directly related to the product (Aqueveque, 2006). Examples of extrinsic cues of a product are price, brand, package, while intrinsic cues are product contents (chemicals), taste, and colors. Zeithaml (1988, p.8) wrote ―the extrinsic cues receiving the most research attention, appears to function as a surrogate for quality when the customer has inadequate information about intrinsic attributes‖. Consumer concerns of product-related risks such as social, financial, and performance risks lead to quality as one of the cues employed in a product evaluation process. A study by Richardson, Dick, & Jain (1994) concluded that consumer evaluation of store brand is determined more by extrinsic cues. 347 Other studies found price is a strong determinant of quality (Brucks, Zeithaml, & Naylor, 2000; Dodds, Monroe, & Grewal, 1991). Another study by Aqueveque (2006) emphasized the role of price as an important cue in evaluating product risks. The author also found that consumers tend to minimize risk from every purchase. Siu & Wong (2002) and Tse (1999) revealed that customers are willing to pay more to get a better and safer product. Based on the discussion of the previous studies, the following hypothesis is developed: H1: Price is positively related to the consumer perception of product quality. In marketing it is widely accepted that a brand is more than just a name of a product or a service. A brand refers to a set of physical and socio-psychological attributes, and beliefs (Simoes & Dibb, 2001). A brand is build to represent a company image such as efficiency, consistent offers, and quality services. In a post-modern era, a brand plays a significant role in shaping consumer identity (Elliot & Wattanasuwan, 1998). The comprehensive meaning of a brand encourages companies to improve their brand equity. The brand with the higher equity generates significantly greater preferences and purchase intentions (Walgren, Ruble, & Donthu, 1995). Pitta & Katsanis (1995) suggested that brand equity represents a condition in which the consumer is familiar with the brand and recalls some favorable, strong, and unique brand associations. Ha (2005) revealed that a variety of brand experience increase familiarity with the brand. The following hypothesis is offered to address the relationship between brand and product quality: H2: Brand familiarity is related to the perception of product quality. The role of endorser in purchasing behavior is well documented in marketing literature (Agrawal, 1995; Aqueveque, 2006; Braunsberger & Munch, 1998; Daneshvary & Schwer, 2000; Dean & Biswas, 2001; Seno & Lukas, 2007; Silvera & Austad, 2004). Since every purchase has a potential risk, consumers seek information to make a right decision. Information search may come from internal (past experience) or external (personal sources, public sources, personal experience) sources. Consumer risks resulted from their limited knowledge of a product can be reduced by adopting other consumer purchasing behavior. The identification process of social influence states that someone is more likely to adopt behavior of another person if he/she identifies with the person (Kelman, 1961). Endorser can be classified into three types, namely celebrity spokesperson, expert, and typical consumer (Fireworker & Friedman, 1977; Frieden, 1984; Friedman & Friedman, 1979). Dean (1999) found endorsement advertising has influenced consumer perceptions of product quality, product uniqueness, manufacture esteem, and corporate citizen. Dean & Biswas (2001) reported that celebrity endorsements can result in more favorable advertisement ratings and product evaluations. However, Tripp, Jensen, & Carlson (1994) identified that celebrity who endorse various products has a lower credibility than one who endorses only one product. Louie & Obermiller (2002) explained that celebrity who misbehaves in his public life could hamper the image of the product he endorses. 348 The use of experts to endorse products is another alternative. Aqueveque (2006) explained an expert opinion is important to customers since his opinion could be considered objective. Expert opinion is a powerful way to reduce a perceived risk in product purchases. Braunsberger & Munch (1998) found that a product which is advertised by an endorser who is high in expertise could lead to consumer positive attitudes toward the endorser and the product advertised. Till & Busler (1998) showed that an endorser's expertise is more important than physical attractiveness in affecting attitude toward an endorsed brand. Friedman & Friedman (1979) stated that expert endorsers are more effective for products that have high financial, performance, and physical risks, while celebrity endorsers are more effective for products that have high psychological and social risks. The researchers offer the following hypothesis: H3: Consumer perception of product safety is related to endorser types. Distribution channel is an important issue for companies in a competitive market. There is a growing need to understand the ways in which consumers may choose between channel and the circumstances under which one channel may be chosen ahead of another (Black et al., 2002). Theodoridis & Chatzipanagiotou (2009) identified personnel, pricing, products, and in-store convenience as factors determining a store choice. Baltas & Papastathopoulou (2003) mentioned that product assortment and quality are key drivers for customers in patronizing stores. A perception of a great assortment certainly influences store image and satisfaction with the store (Anselmsson, 2006). In general, the more specialized and reputable a store is in selling the product, the more highly will the quality of its products be perceived (Tse, 1999). Therefore, we formulate the following hypothesis: H4: A product sold in a specialty store is perceived to have a better product safety. A choice of appropriate strategy and promotion media could significantly determine company success in meeting its marketing objective. Media is a source of external information used by customers in choosing a product. A challenge faced by a company in media planning is how to optimize company resources in various media programs such as television, radio, magazines, newspaper, and other media to optimize profit (Dalrymple & Parsons, 1986). Even, expensive promotion budget may not lead to customer positive responses of the product. Consumers have different preferences in using media channels in information search. Pilotta et al., (2004) concluded that more than 50% consumers are engaged in various combination of media through the day, whether it is being online and watching television, reading a magazine and watching television, reading a newspaper and watching television, etc. Based on a cost benefit approach, consumers consider using a certain media channel if the benefits of including this channel in their consideration set exceed their individual threshold of consideration (Bronnenberg & Vanhonacker 1996; Wendel & Dellaert, 2005). Television is one of the media most used by consumers in information search. In addition to visual advantage, television also has a better coverage compared to other media. It is therefore suitable for promoting mass products, attention getting, and high prestige purposes (Kotler, 2000). We may offer the following hypothesis: 349 H5: A product advertised on television is perceived by customers to have a better product safety. A number of studies have reported a trend of a sustainable business in which companies are offering more environmentally products to customers (Cleveland, Kalamas, & Laroche, 2005; Follows & Jobber, 2000; Straughan & Roberts, 1999). Kalafatis et al., (1999) stated that customer concerns on environment can be demonstrated by buying environmentally friendly products. Consumer interest on green products is increasing. More and more consumers are searching for information about environmentally friendly product and are willing to pay more for them (Laroche, Bergeron, & Barbaro-Forleo, 2001). In the cosmetics industry, the demand for green product is rapidly increasing. Johri & Sahasakmontri (1998) found that cosmetics customers prefer natural products and safety attributes are perceived important in a decision making process. To some customers, green advertisement is another external source of information to differentiate environmentally products from ―regular‖ products (Grankvist et al., 2004). Products labeled environmentally friendly are perceived safer. Thus, positioning a brand as a ―green brand‖ could entails an active communication and differentiation of the brand from its competitors through its environmentally sound attributes. Ecologically sustainable products will not be commercially successful if green brand attributes are not effectively communicated (Pickett, Kangun, & Grove 1995). Coddington (1993) suggests that green positioning as an essential factor in the success of green branding strategies. The researchers therefore develop the following hypothesis: H6: A product which is positioned as green product is perceived to be safer by customers. Product certification is very important in modern marketing. In an industry where various goods and services are available, a certified product could imply that the production process of the product meets the industry standard and consumers could perceive that the product is safe. Vertinsky & Zhou (2000) stated some certification design processes provide industry and consumers with economical ways of obtaining credible and standardized information about products. Sodano, Hingley, & Lindgreen (2008) explained that product certification can be seen as an attempt to build a company reputation. Botonaki et al., (2006) described that one of the main reasons customers do not buy organic products is the products are not certified by authorities. Therefore, to minimize customer doubts of the product, a company can ask a third party to evaluate its production process. A third party can provide social pressure to a company by encouraging consumers to boycott uncertified products (Vertinsky & Zhou, 2000). In Indonesia, a cosmetics company has to have product certifications from Department of Health and Department of Trade. In addition, since majority of the population in the country are Muslims, every product related to foods, drugs, and cosmetics must be certified by MUI (Board of Muslim Cleric). We therefore offer the following hypotheses: H7a: Customers perceive certified products are safer than noncertified products. 350 H7b: Customers perceive that products certified by Department of Health are safer than those certified by Department of Trade or MUI. A product life cycle provides important clues in designing a marketing strategy since each phase in life cycle has different characteristic (Mohan & Krishnaswamy, 2006). In early stage of the life cycle, a product is not well recognized by consumers and customer suspicion of the product performance and quality is relatively high. The marketing effort at the early stage is designed to create markets by aggressive promotions. In the growth stage, consumers are well aware of the product and marketing efforts are designed to create a product awareness which would result in repurchase of the product. Mohan & Krishnaswamy (2006) stated that attempts to improve product awareness can be achieved by feature additions, improvements in product styling, quality and service, and market segmentation. In maturity and decline stage, sales are relatively stable and would eventually decline. Few new firms or consumers enter the market, and consumers are relatively familiar with competitive products. Hence, on the average, consumers are less informed and more likely to depend on advertising in the early stages of the PLC than in the later stages (Tellis & Fornell, 1988). The authors concluded that the positive effects of quality are stronger in the late stages of the PLC, when consumers are better informed about competitive product. We may therefore offer the following hypothesis: H8: Products which are recently launched in the market (introduction stage) is perceived by customers to have a lower safety level compared to those in later stage of its life cycle, (growth, maturity, and decline stages). The relationship between country of origin and product quality has been reported in the marketing literature (Hamin & Elliot, 2006; Hoffman, 2000; Kaynak, Kucukemiroglu, & Hyder, 2000; Zain & Yasin, 1997). Hoffman (2000) found that majority of customers, especially women, in Sweden apply country of origin as a quality cue to evaluate food quality and food safety. Other studies conducted by Han (1990) and Schaefer (1997) revealed that customers would only use country of origin to determine the quality of products when they unfamiliar with the brand of the products. Consumers‘ knowledge of country of origin will influence their perception of a product quality. Kaynak, Kucukemiroglu, & Hyder (2000) and Zain & Yasin (1997) found that products produced in less developed countries tend to have a less positive image than products from more developed countries. In Indonesia, country of origin is also related to ethnocentrism. Hamin & Elliot (2006) found that Indonesian customers who have a higher degree of ethnocentrism prefer products made in the country to those imported from other countries. We therefore, develop the following hypothesis: H9: Products manufactured in Indonesia are perceived to be safer than those imported from other countries. RESEARCH METHOD The survey was based on a convenient sample of female students using cosmetics in the city of Bengkulu. Three hundred and seventy self-administrated questionnaires were distributed to female who use cosmetics and 367 questionnaires were returned and analyzed for the study. 351 Questionnaires were distributed in the campus of University of Bengkulu and several high schools in the city. Respondent characteristics can be seen in Table 1. TABLE 1 RESPONDENT CHARACTERISTICS Demography indicators Sum Age Category Teenagers (14-17 old years) Young people (18-25 old years) Mature (above 25 old years) 129 208 30 Education High School Undergraduate Postgraduate 129 193 45 Marital Status Married Unmarried 19 349 Employment status Employed Students 45 322 Monthly income for working respondents Less than IDR2 million Between IDR2-5 million More than IDR5 million 18 23 4 Monthly father‘s income for students Less than IDR2 million Between IDR2-5 million More than IDR5 million 163 144 13 Monthly mother‘s income for students No income Less than IDR2 million Between IDR2-5 million More than IDR5 million 150 103 63 4 Monthly expenditure on cosmetics Less than IDR100 thousand Between IDR100-200 thousand Between IDR200-500 thousand 272 75 20 Constructs of external product cues employed in the study were based on the work of Siu & Wong (2002), namely price, brand familiarity, endorser, distribution channel, promotion channel, and country of origin. Indicators of each product attributed were developed and adjusted to the need of the Indonesian context. The authors added three other important product cues such as product positioning, certification, and product life cycle. Detailed product attributes of extrinsic cues employed in the study are shown in Table 2. 352 Wilcoxon Test is employed to the data set to examine paired related samples (hypothesis 1, 2, 6, and 8) and Friedman Test is used to determine k related samples (hypothesis 3, 4, 5, 7, and 9). The authors also employ one sample T-test to examine significant influencing attributes of the extrinsic cues of product safety. RESULTS The result of data analysis is depicted in Table 2. Having conducted a series of Wilcoxon and Friedman tests, the researchers conclude that there is no evidence to reject the nine hypotheses developed in the study. TABLE 2 PRODUCT ATTRIBUTES OF EXTRINSIC CUES Product attributes of extrinsic cues Mean Standard deviation Significance level Hypothesis 1: Price High price cosmetics Low price cosmetics 4.33 2.83 0.996 1.107 0.000 Hypothesis 2 : Brand Familiar brand Unfamiliar brand 4.48 2.70 0.768 0.999 0.000 Hypothesis 3 : Endorser Type Unfamiliar celebrity Familiar celebrity Cosmetic expert Healthcare expert (such doctor) 3.48 4.10 4.64 5.10 0.852 0.812 0.922 0.840 0.000 Hypothesis 4 : Distribution channel Drugstore Supermarket Specialty store such cosmetic store Personnel selling Convenient store 4.50 4.01 4.28 3.72 2.77 0.862 0.745 0.736 0.872 0.920 0.000 Hypothesis 5 : Promotion channel Television Personnel selling such multilevel marketing Magazine 4.21 3.69 3.80 0.682 0.857 0.710 0.000 Hypothesis 6 : Product positioning strategy Green/nature product positioning Non-green product positioning 4.79 2.83 0.760 0.855 0.000 Hypothesis 7a and 7b : Certification labeling Certification labeling by Department of Health Certification labeling by MUI Certification labeling by Department of Trade Uncertified product 4.98 4.63 4.46 2.02 0.824 0.974 0.939 1.087 0.000 Hypothesis 8 : Product life cycle stage (PLC) Cosmetics in later stage of its life cycle Cosmetics in the introduction stage of PLC 4.37 3.35 0.871 0.735 0.000 Hypothesis 9 : Country of Origin Indonesia brand, made in Indonesia China brand, made in China USA/Europe brand, made in Indonesia USA/Europe brand, made in USA/Europe 4.33 3.09 3.47 3.54 0.756 0.993 0.928 1.015 0.000 353 The study indicates a clear relationship between prices of the cosmetics products and consumer perceptions of product safety. Consumers believe that expensive cosmetics reflect a safer product quality than cheaper cosmetics. The study also identifies that familiarity of the brand influence consumer perceptions of product quality. Well-known brands are perceived to have a better product safety compared to unfamiliar brands. The study clearly identifies the relationship between endorser types and consumer perceptions of product safety. Cosmetics which are endorsed by doctors and beauty experts are perceived to have a safer quality compared to those endorsed by actresses or actors. Respondents also believe that cosmetics which are distributed in drugstore and cosmetics store to have a safer quality than cosmetics sold in convenient stores or distributed through multilevel marketing. In addition, consumers have a higher level of confidence toward cosmetics advertised on television compared to those promoted through personal selling. The study also identifies a significant relationship between product positioning strategy and perception of product safety. Consumers perceive cosmetics positioned as green products are safer than those labeled as inorganic cosmetics. The study also reveals a relationship between a type of certification agencies and consumer perceptions of product safety. Consumers believe that cosmetics which are certified by the Department of Health and MUI are safer that those certified by the Department of Trade. The mean of consumer perceptions of the uncertified cosmetics is the lowest. The study also shows a relationship between product life cycle and consumer perceptions of product safety. Products which are in the later stage of life cycles are perceived to have a better safety image than products in the introduction stage. The last hypothesis, the relationship between country of origin cannot be rejected either. The study identifies that consumer perceive cosmetics made in Indonesia to have a better safety compared to those imported from other countries, especially those which are imported from China. The authors employ one sample T-test to determine consumer perception of extrinsic cues of cosmetics safety attributes (see Table 3). The result of the analysis indeed identifies that there a relationship between the extrinsic cues and consumer perceptions of product safety. The analysis identifies cue attributes highly rated by customers are product endorsement by doctors (5.10), certification by Health Department (4.98), and positioning strategy theme (4.79). While consumer perceptions of extrinsic cues such as, country of origin (4.33), prices (4.33), and channel promotion are above average (4.21). TABLE 3 ONE SAMPLE T-TEST OF CONSUMER PERCEPTION OF COSMETICS SAFETY ATTRIBUTES Consumer perception of cosmetics safety attributes Mean Significance High price cosmetics Familiarity brand Endorsement by healthcare expert (such doctor) Distribution channel by drugstore Promotion channel by television Green/nature product positioning strategy Certification labeling by Department of Health Cosmetics in growth, mature, decline stages Country of origin (Indonesia brand, made in Indonesia) 4.33 4.48 5.10 4.50 4.21 4.79 4.98 4.37 4.33 0.000 354 IMPLICATIONS In a competitive industry such as cosmetics where various products are available in the market, consumers apply a set of extrinsic cues to address product safety issues. The study has identified customer perceptions of nine extrinsic cues of cosmetics safety. Marketers need to address product safety issues in their marketing strategies by taking into account the nine variables included in the study. Extrinsic product cues such as product endorsement by medical and beauty experts, certification by Health Department, and positioning strategy theme are highly rated by customers. In the case of product endorsement, cosmetics customers in the country prefer cosmetics are endorsed by medical experts. Thus, cosmetics endorsement commonly conducted by actresses in the country may not strongly appeal to customers. The results of the study also suggests that it would be more effective for a cosmetics company to have their products certified by the Department of Health, rather than by other certifying bodies such as MUI or the department of Trade. However, since majority of Indonesians are Muslims, it would be ignorant not to have product certification by MUI. Although it is difficult for consumers to determine whether materials of cosmetics are not against their religion, it will certainly help Muslim customers if the cosmetics are certified by MUI. Interestingly, product positioned as green product is highly rated by customers. It seems that consumer awareness toward environment is growing in the country. It could also mean that consumer perceive that cosmetics which are positioned as green product are less harmful. Therefore, designing a green theme in product positioning could be an effective way to reach segments of customers who demand environmentally friendly products. It should be noted however, the study is based on a sample of high school and university students and may not represent the real behavior of cosmetics customers. Consumer perceptions of country of origin may also be influenced by the degree of ethnocentrism. The study is based on consumer perceptions of cosmetics usage and may not represent consumer perceptions of extrinsic cues for other products. 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[email protected] ABSTRACT A primary role for management consultants is to identify the causes of issues that are preventing the achievement of required performance in the organisations to which they are contracted. Attribution theory is concerned with understanding interpersonal relations and, in particular, how and why people make attributions as to the causes of their own behaviour and that of others in those relationships. This paper posits that attribution theory can be linked to management consulting and that knowledge of the linkage and its implications can make a consultant and client identification of causal problems more accurate and reliable. The accuracy and reliability of problem identification are key factors in whether solutions generated to reduce or eliminate the problem will be successful. Implementing solutions to a wrongly identified problem can result in the failure of a consulting contract to meet its expectations and this can have severe repercussions for both the consultant and the client organisation. INTRODUCTION For some time I have been attracted to the idea of relating attribution theory to the profession of management consulting and this paper is an attempt to discuss this relationship. As a management consultant at both national and international levels I have had considerable experience at helping organisations to solve performance problems they have problems solving. In addition, as a member of the Institute of Management Consultants, I have had the privilege of discussing performance problems with colleagues and trying to find the common elements causing such problems. The major variables consultants face when working on organisational performance issues are the tasks and systems being worked on and the individuals and groups who do the working. Thus we often find we make a choice between the workers and the systems they work on as being the prime cause of these performance issues. In this paper I address attribution theory and areas where this theory has been applied, the consulting role in organisations, a model of how performance is achieved in organisations and whether there is any merit in applying attribution theory to management consulting. ATTRIBUTION THEORY This theory had its origins in the work of Fritz Heider (1958) who considered how people make causal explanations about their own behaviour and the behaviour of others in their interpersonal relationships. One important aspect of his life space concept (the subjective 361 environment of a person) is the way in which people attribute causes to events. As he suggests, ―attribution in terms of impersonal or personal causes are everyday occurrences that determine much of our understanding of, and reaction to, our surroundings‖ (Heider, 1958, 16). Some other factors basic to his consideration of life space and causation are perception, sentiments, power and ability and motivation as they apply to both people and the environment they occupy at particular points of time. All these play a role in how a person attributes causes to behaviours, events and results. Heider surmises that, underlying attribution there is a three stage process involving perception, judgement and attributing cause. First a person must observe the behaviour and second he or she must believe that the other person‘s behaviour was intentional. Finally the observer must decide on the cause of the behaviour. The observer will attribute the cause to the situation (an external cause) if he or she believes the other person was forced to behave that way. The observer will attribute the cause to the other person (an internal cause) if not. Most key followers of Heider‘s work have seen causality as attributed to external or internal factors - Jones and Davis (1965), Kelley (1973), Weiner (1986) as well as all the contributors to the 2 nd Florida State International Symposium on Attribution Theory held in February 2004 whose papers are collected in a book edited by Martinko (2004). Malle (2006), however, claims that Heider himself did not see the ―internal‖ versus ―external‖ distinction being central to explaining human behaviour. Heider, he said, used a model of impersonal causality and one of personal causality as being central to this explanation – see the life space comments above. It seems to me that the debate (initiated by a book review authored by Davis, 2009) centres on semantics and for my purposes I will hold to Heider‘s later statement in his seminal book (Heider, 1958, 82), ―…the result of an action is felt to depend on two sets of conditions, namely factors within the person and factors within the environment‖. I am happy to interpret ―personal‖ as ―internal‖ and ―impersonal‖ as ―external‖. In essence the theory suggests that the causes of events and behaviours can be perceived as being attributed to factors either internal to a person or external to a person (in the environment). The internals are factors like motivation, knowledge, ability, emotions and so on and the externals are factors like other people, conditions, instructions, policies and procedures, equipment, location and so on. Of the many possible biases in making judgements about causal attribution in social perceptions, one of the most important is called fundamental attribution error (Fiske and Taylor, 1992, 67). This refers to the tendency for an observer to attribute the causes of another person‘s behaviour to internal sources (personality traits, ability etc) as opposed to external or situational sources. Watson, Rogers and Dudek (1998, 497) elaborate further on this tendency: Attribution theory suggests that whether the person discerning the causal relationship is the actor or the observer is integral to what is perceived to be the causal variable. Attribution theory suggests that observers focus on the actor and have a tendency to assign causation to the actor‘s attributes. On the other hand, the actor has an external 362 focus and has a tendency to perceive his or her actions as caused by external variables. Thus, they say, the basic heuristic is that observers will perceive internal factors as causal and that actors will perceive external factors as causal. As an example of such observer bias, Lord and Smith (1983, 52) suggest that ―…equipment breakdowns often are attributed to the operator rather than defective materials or poor maintenance‖. This bias has been recognised before in the seminal work of Brown and Jaques on the famous Glacier Project (Brown and Jaques1965). They recognised that the organisation chart or hierarchy exists irrespective of people but people often blame other people‘s behaviour for problems when often it is a fault in the design of the social system (hierarchy) of which their own roles are a part. Actor bias is sometimes called self-serving bias in that people will interpret their environment so as to maintain a positive self-image. In other words they will attribute success to their own abilities or efforts while attributing failure to external factors like poor instructions, equipment or supervision (Jones and Nisbett, 1971). Another bias that is noted in the attribution theory literature is confirmatory bias (Snyder and Swan, 1978). Observers form an opinion or belief about the individuals or groups with whom they are interacting and notice information consistent with their opinions and beliefs to a much greater extent than they notice information inconsistent with them. Fiske and Taylor (1992) note that this bias has been noted in a variety of settings. The concluding comments of the participants in the book of collected papers, noted above, included the following parting thought on the application and development of attribution theory (Marinko, 2004, 299): ---the theory could and should be integrated into almost all major organisational behavior topics such as leadership, organisational citizenship, impression management, counterproductive behaviors such as turnover and aggression, conflict management and strategic planning. In this paper I am suggesting that the theory also has application in management consulting, particularly the bias of fundamental attribution error, or FAE. MANAGEMENT CONSULTING Consulting to management, as either a specialist or a generalist, is an important profession in relation to helping organisations and their employees to lift performance. It is a multi billion dollar industry which has a professional membership body – the International Council of Management Consulting Institutes. This body co-ordinates the activities of some 40 national Institutes of Management Consultancy (IMC‘s) each of which is mandated to accredit qualified members with CMC status ie Certified Management Consultant, and to maintain International Council ethical standards. Notwithstanding the existence of the professional institutes, most consultants are self identified with no relationship to these bodies as there are no barriers to entry and anyone can call himself or herself a consultant to management without being a member of the professional institute. It would require another paper devoted to the topic to discuss the reasons for this divide but suffice to say it does have implications in regard to authenticity, credibility, professional claims and sanctions for failed consulting assignments. 363 The IMC defines management consulting as an independent and objective advisory service provided by qualifies persons to clients in order to help them identify and analyse management problems and opportunities. They may also be involved in recommending solutions or suggested actions with respect to these issues and may assist, when requested, in their implementation in order to help the client organisation achieve its purpose (Smith, 2000). A simpler definition could be that consultants help people to solve problems that they are having problems solving. This helping role is defined by Schein (1969) as process consulting and by Schaffer (2002) as high impact consulting. The process approach de-emphasises the expert role traditionally given to consultants and replaces it with a facilitative role in helping clients – consultant and client become joint venturers in problem solving. The client retains ownership of the problem and works with the consultant in developing solutions which they feel are capable of implementation. In a sense, consultants are observers of the organisational theatre in which the employees or ―actors‖ play their roles in a task script and stage dictated by the structure, policies and procedures set down by management. While organisations are obviously not theatres, they are, in a sense, ‗theatrical‘ in nature. This so-called dramaturgical approach to organisational operation was promulgated in management and organisation circles by the late Ian Mangham (1986 ) who based his ideas on the initial work of Erving Goffman (1958). Mangham was also a keen afficianado of Shakespeare and Brecht as I discovered during his seminars at Bath University where I studied in the early 1980‘s. Goffman suggested that social interactions could be considered from a ―theatrical‖ or ―performance‖ perspective. His studies of Scottish crofters initiated his concept of backstage and frontstage interactions where the same people behave in different ways because of the different context. It is a theme also described by Timothy Clark (1995) who calls consulting the art of impression management ie managing the impression they give off and interpreting and managing the impressions they gain of the client organisation and its members. While the parting thoughts at the Symposium noted previously mentioned impression management as an area for attribution theory research, I think it unlikely that the participants in that event would have considered that their view of impression management equated to management consulting. The dramaturgical approach to organisations provides a bridge to attribution theory in that we have a situation being played out by actors who, of course, can also be observers of each others‘ behaviour. In practical terms management consultants deal with problems and the causes of problems in this ―theatre‖ and it is in relation to this nexus that attribution theory can make a contribution as consultants can be considered as outside observers of both the situation and the actors. PERFORMANCE AND ITS RESULTS IN ORGANISATIONS Organisations generally are interested in results. These results are often called key performance indicators (KPI‘s) and are a measure of how well people and the system are functioning. When these KPI‘s are not in line with expectations management considers that 364 they have a problem. Costs may be rising, profits falling, morale falling, customer complaints rising, sales falling, productivity falling and so on. These negative indicators are, strictly speaking, not problems, but symptoms of problems that will be existing further back in the value chain. From a consultant‘s perspective, it is vital to determine what is causing a particular issue to arise. Only when the problem is identified can various options to address the problem be developed and considered. In other words what can they attribute as being the cause of the symptoms being exhibited? Cummings and Schwab (1973) present a very useful model of performance determinants which suggests that performance is the outcome of the relationship between individuals and the environments in which they work. The ability and motivation of the individuals and the factors in the environment such as job design, supervision style, training, compensation, fellow workers, work conditions, equipment and so on, interact to determine performance behaviour and its degree of effectiveness and efficiency. For the results achieved by an individual this model could be expanded and expressed as follows: Work Environment <------> Individual -------->Behaviour -------> Performance Standards Job Person Incentives Ability Quantity Satisfaction Conditions Willingness Quality Safety Type of supervision Knowledge Time Rewards Fellow workers Expectations Cost Self-esteem Equipment Aspirations Training Learning capacity | Appraisal Emotions | Discipline Needs ---------------| Communication Feedback for change if Objectives standards not achieved Job design Structural relations Standards (KPI‘s) Opportunity Culture In attribution theory terms, every work situation or system contains people working as individuals, either alone or in groups, within a particular environmental framework and these individuals are both actors and observers. Trist and Bamforth (1951) put the relationships in another way by describing the organisation as a socio-technical system. It is the interaction between the social system and the technical (task) system that results in performance – hopefully in a form that satisfies both system standards. In regarding organisations as systems it needs to be recognised that any changes in either the social or the technical system will have an impact not only on the system immediately affected but also on the other system. 365 Despite the fact that one of the most visible manifestations of an organisation is its people ie those involved in the social system, we should not allow this to delude us into thinking that the organisation is its people. People enter and leave an organisation but it persists as an entity in its own right – the stage and the script go on even if the actors change. The effectiveness and efficiency of organisational performance is, of course, linked to individual and group performance, but excellent individual performances will not necessarily result in excellent organisational performance. It is precisely because the organisation exists as a total system in its own right that creates this paradox. Most people who join an organisation often find that their effectiveness is determined more by the quality of information flows, the workability of the structure and its associated procedures, the clarity of objectives and the suitability of technology for the tasks allocated than by their own individual motivation, knowledge and skill. Behaviour is organisationally based and is determined as much by structure and systems as by an individual‘s capability and psychological make-up; as the above model illustrates. MANAGEMENT CONSULTING AND ATTRIBUTION THEORY Heider‘s (1958) concept of life space could be applied in organisations where each individual‘s life space is the people, objects, systems and events apparent in the organisation. It would not be drawing too long a bow to suggest also that the organisation itself has a life space which is composed of all the elements that make up the organisation. It is this space into which management consultants intervene in order to do whatever the client organisation terms of reference have asked them to do. Thus they are essentially observers of what is going on in the organisation‘s life space and are expected to help improve performance as a result of these observations. It is in this regard that they would be well advised to be aware of attribution theory and, in particular, FAE. As suggested by the FAE supposition, because consultants are observers, they can easily fall into the error of attributing poor performance to the actors ie those people who are doing the performing. Because people are the most visible manifestation of the organisation‘s life space and most of the environmental factors noted in the model above are more or less invisible unless searched out, then it easy to see why FAE is both a theoretical and practical possibility. Very often it is the structural and operating systems and their balance that requires change in order to provide a suitable framework for generating the required individual and group performance in pursuit of organisational goals rather than people change. The message for management consultants is that systemic factors can affect performance as much as the actual behaviour of people! It should be noted that the performers themselves, as noted previously, will attribute their poor performance, if it occurs, to factors in the external environment. But this is usually seen as ―an incompetent worker blaming the tools‖ type excuse and does not carry a lot of weight with observers even though it could reflect the true situation. It can also be suggested that consultants should be aware of the nature and consequences of confirmatory bias. The danger of rapidly developing a solution (or having a pre-conceived ―cookie cutter‖ solution) based on the symptom, and then looking for confirmatory evidence to support this solution rather than carrying out a more in-depth investigation to find the core problem, is ever present. This can occur when pressure mounts from the client for a result and action. 366 A VIEW FROM EXPERIENCE To state things simply – the worst of systems can easily defeat the best people. Yet people often get the blame when performance falters and ‗people change‘ is often the main focus when aiming at improvements. The other organisational variables are usually ignored and critical decisions like structural or systems change get short thrift. I have seen a number of examples in both the private and public sectors of the application of the ―cut people to cut costs‖ theory where it can result in good performers getting axed. The statement that people are our most important asset is breached more often than it is honoured. There is no doubt that staff reductions can be necessary but my point is that a better analysis of the total situation may enable costs to be reduced without the loss of intellectual and physical capital resulting from dispensing with people. In one particular case of a business down turn in an engineering company to whom I consulted, management were prepared to take the time to collect evidence of operating procedures and the costs involved in all aspects of the business. As a result they were able to reduce breakdowns and stoppages, reduce wastage, improve procurement methods, design a more efficient machine utilization programme and revamp their marketing model – the whole exercise leading to the company being able to retain their existing staff and turn profits around. Restructures and policy and procedure changes which can have a great impact on performance are often decided by management over morning coffee. For example I have been involved in observing discussions in a real estate company and in an education institution where major changes to the structure were promulgated over a one day period on the basis of little researched evidence except a few top managers‘ personal views on how things should be done. On the other hand, the problem of whether or not to buy a new machine or to run a training programme will receive all the considered attention of the financial experts and top management, with a rigorous examination of pros and cons before a go or no-go decision is made. A mining company for whom I did some work took six months to go through a number of committees and management levels before it was finally decided that money could be spent on a supervisor training course. I have deliberately exaggerated in the negative example above in order to highlight what is, in my mind, the very real issue in many organisations of whatever size today. The structure of relationships between jobs and people at both the formal official level, as well as the informal unofficial level, is being overlooked when investigating the causes of poor performance. It is being overlooked by managers and by management consultants alike because of FAE disguising the important influence of environmental factors. CONCLUSION Attribution theory is useful to both management consultants and the managers with whom they work. In terms of attributing causes to performance problems the answer lies in them both recognising the need to be continuously generating information about the organisation in which they are involved. This information must be analysed in order to be able to have clear evidence about what is happening, and why, so that appropriate action can be taken to overcome current problems as well as prevent future problems, to utilize opportunities and to react sensibly to the unexpected. Managers are action oriented people and urging them to think more deeply before giving a knee jerk reaction to events is not easily accepted. Management consultants should also be 367 advised that thinking more deeply is vital to determining the source of performance problems and that ―cookie cutter‖ solutions (Fox, 2002, Head 2002) are a poor answer to the failure to do so. The latest message from the management gurus who write books on how best to manage is that ―evidence based management‖ is the key to success (Pfeffer and Sutton, 2006). While I do not always agree with such ―new Jerusalems‖, in this case I think they have a point. 368 REFERENCES Brown, W and Jaques, E. (1965) Glacier Project Papers. Heinemann. UK Clark, Timothy (1995) Managing Consultants: Consultancy as the Management of Impressions. Open University Press. Buckingham. UK Davis, Keith E. (2009) ―An Overlooked Classic? Review of How the Mind Explains Behaviour: Folk Explanations, Meanings, and Social Interaction.‖ The Journal of Social Psychology. 149 (1). 131-134 Fiske S.T. and Taylor, S.E. (1992) Social Cognition. 2 nd Edition. McGraw-Hill. New York Fox, C. (2002) ―From Fad to Curse.‖ Australian Financial Review. 06/12. pp.22 Goffman, Erving (1959) The Presentation of Self in Everyday Life. Harmondsworth. Pelican Head, B. (2002) ―One Size Fits All.‖ The Age. 12/11. pp7. 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(1986) An Attribution Theory of Motivation and Emotion. Springer-Verlag. New York 370 AN EMPIRICAL STUDY OF THE CONTEMPORARY LEGACY OF THE 1994 GENOCIDE ON BUSINESS IN RWANDA Victor Egan Curtin University of Technology GPO Box U1987 Perth Western Australia 6845 Tel : +61 8 9266 3307 Fax : +61 8 9266 2378 E-mail :
[email protected] ABSTRACT Private-sector business enterprise is most often touted as the driving force for economic development by way of entrepreneurial innovation, and employment opportunities created. In this context, the health of the private sector should be of paramount concern to governments, particularly those with the responsibility of delivering economic progress and improved living conditions to the citizens of less developed countries. In the case of Rwanda, the 1994 genocide provided a catastrophic episode that severely traumatised the society, and fundamentally impacted on social cohesion and commercial interaction. This paper, firstly, takes an extensive historical journey through Rwandan society to establish the social and political context to the 1994 genocide. The paper then presents the results of a study which sought to examine the immediate and continuing impact of the genocide on private- sector business enterprises. Sixty-six (66) business owners/managers, government officials, and representatives of genocide survivors’ organisations were interviewed. The results indicate that a number of issues had an immediate impact on the economic and social fabric of the country in 1994. These issues include catastrophic loss of human resources, property, and agricultural production, as well as the destruction of any remaining sense of trust and social cohesion. In addition, a further set of issues were established as producing a continuing and destabilising effect on the economic and socio-psychological progress of Rwanda. These continuing issues include discrimination and violence, international community perception, strong political control, and regional instability. The study demonstrates that 400 years of historical circumstance has deeply ingrained a socio- psychological prejudice that cannot be readily eradicated. The results further suggest considerable challenges ahead for the Rwandan government in promoting the sort of vibrant entrepreneurial environment within which economic development can progress. INTRODUCTION The development of an efficient private business sector in Sub-Saharan Africa is of critical importance in the quest to deliver sustainable economic growth and rising living standards in the region (Ramachandran & Shah 1999). In support of an efficient private sector, there are many factors that influence sustained economic growth, including geography, education, access to land and finance, and infrastructure (Bleaney & Nishiyama 2002). In addition, entrepreneurial activity and effective business enterprise have often been proffered as important mechanisms to promote employment, productivity, and innovation, and hence, progress the economic development of a country (Daniels & Mead 1998; Djankov et al. 2008; Klapper & Delgado 2007; Spencer & Gomez 2004; van Praag & Versloot 2007). However, many constraints to business enterprises remain in much of Sub-Saharan Africa. These constraints include unfair competition from the informal sector, poor access to land and infrastructure, 371 lack of access to finance and requirements for collateral, low productivity of human resources, inequality in tax administration, and corruption (Enterprise surveys 2008; Kellow 2007; Kuzilwa 2005; Trulsson 2002; UNCTAD 2006; UNCTAD 2007). Within the business context of Sub-Saharan Africa, business enterprises in Rwanda are additionally burdened with a recent historical episode of catastrophic significance. The genocide of 1994 devastated not only the economy, but also social capital, in each case providing a legacy to a deeply traumatised society. In terms of the economy, Rwanda‘s gross domestic product (GDP) fell by 50 percent in 1994. Between 1994 and 1997, GDP grew by 70 percent, as a result of a return to a sort of stability. Rwanda‘s GDP growth since 1997 has generally been 6-9 percent, but is still driven predominantly by coffee and tea exports. Indeed, agriculture accounts for 41 percent of GDP, and 90 percent of employment in rural areas. Private sector contribution to the economy remains limited, with Rwanda reportedly having only about 400 business enterprises (UN 2007). Foreign aid dependency is high, accounting for 60 percent of public expenditure (UN 2007). To the casual visitor and superficial observer, Rwanda appears to have made remarkable progress since the devastation of the 1994 genocide. However, the country is still desperately poor, with a per capita GDP of US$1,000; a growing economic gap between the vast peasant majority, and a small privileged elite; over 60 percent of the population existing on less than US$1 per day; and average life expectancy of 49 years (Caplan 2005; CIA 2009; UN 2007). This paper will, firstly, take an extensive historical journey through Rwandan society to establish the social and political background and context to the 1994 genocide. Following this, the paper will present the results of a study which sought the views of Rwandan business owners/managers, government officials, and representatives of genocide survivors‘ organisations on the immediate impact of the genocide, as well as its continuing legacy for private-sector business enterprises. THE HISTORICAL CONTEXT OF HUTU-TUTSI ANIMOSITY: 1600-1959 The Rwandan genocide is often understood by projecting the present into the past. This recent convention by genocide writers has led to the popular proliferation of a number of false assertions, such as the notion that ‗Hutu‘ and ‗Tutsi‘ is a tribal distinction dating back to antiquity, and the notion that genocidal violence in Rwanda is a recent development perpetrated solely by colonial powers (Mamdani 2001). In reality, the nature of present-day Rwandan society cannot be fully comprehended without an understanding of the historical events dating back to the 17 th -century that serve to underpin modern social division (Vansina 2004). The Nyiginya kingdom was founded by Ruganzu Ndori in the 17 th -century. The small kingdoms of central Rwanda were conquered to become part of a centralised kingdom. Cults emerged to legitimise regal authority; for example, the cult of Gihanga (fictional creator and blood-related to the king), rainmaking rituals, and divination of the spirit world (Vansina 2004). From the Nyiginya kingdom emerged a military apparatus with which to foster expansion and maintain control within. Rwandan society was, from this point, indoctrinated with the notion that ―violence, imposture, and the right of the strongest‖ was the legitimate means of political authority (Vansina 2004, p.62). It was also during this period that the term ‗Tutsi‘ was used to designate herders, irrespective of their ethnic origins. Rwandan society was fundamentally transformed in the 19 th -century. The transformation lay in increasing population density. Increasingly scarce resources reinforced the power of local chiefs and administrators by way of their command over land tenure. Stratification ensued as local chiefs and administrators reaped the rewards of their positions. Unfortunately, the other perspective to this dynamic was the ―general pauperization of the bulk of the inhabitants of the country‖, who were mainly categorised as Hutu (Vansina 2004, p.133). To add to the stratification, a new and burdensome system of corvee labour was introduced by the king in about 1870. This new system required 50 372 percent of a farmer‘s time to be set aside for services to the local chief. The fact that the burden befell farmers, and not herders, very soon exacerbated social division, and led to the hierarchalised categories of ‗Tutsi‘ and ‗Hutu‘. ‗Tutsi‘ was a term that became associated with social prestige, while ‗Hutu‘ was a derogatory label used by the Tutsi to suggest ―rural boorishness and loutish behaviour‖ (Vansina 2004, p.134); it was a term reserved for servants, foreigners, and non-combatants in the army. Because these groups were predominantly farmers, Hutu-farmer and Tutsi-herder differentiation became the social cleavage (Vansina 2004); but to reiterate, this differentiation was social, NOT ethnic. The first Hutu insurrection against perceived Tutsi exploitation occurred from the 1880s. These were easily and brutally suppressed by the Tutsi power-holders, and their substantial military backing. Europeans at the time misinterpreted this as racial hatred, but was in fact, class conflict. While Tutsi portrayed themselves as a privileged racial group, the designated Hutu never viewed themselves as a single racial or ethnic entity (Mamdani 2001). The so-called ‗Hutu‘ saw this as nothing more than an insulting and degrading label. Their affiliation was lineage-based and geographic specific, with little evidence of wider tribal allegiances. The awareness of pan-Hutu commonality was to arise from common exploitative and oppressive experiences at the hands of the ruling Tutsi elite (Vansina 2004). Indeed, in pre-colonial times, social mobility was evident. Hutu were able to accumulate cattle and rise through the social hierarchy; they could kwihutura (‗shed Hutuness‘) and become Tutsi. Conversely, loss of cattle could result in loss of Tutsi status. This social mobility, albeit statistically small, was a psychologically stabilising process (Mamdani 2001). Newbury (1998) and Smith (2006) both noted that mass murders based on ethnicity were unknown in the pre-colonial period. The Berlin Conference of 1884-85 marked the beginning of colonial control for Rwanda. The Conference resulted in Germany being ceded control of Rwanda, Burundi, and Tanganyika. Germany lost their colonial possessions in 1918 under the Treaty of Versailles, at which time the colony of Ruanda-Urundi was made a League of Nations protectorate governed by Belgium. The Belgians believed the role of the colonial administration should be to control, guide, and develop their possessions in an indirect manner using the traditional institutions as already controlled by the Tutsi (Ndayambaje & Mutabaruka 1999). As such, they surreptitiously made the Mwami ruling structure more rigid and socially immobile (Caplan 2005). From the early-20 th -century, the German, and later Belgian, colonisers implemented a system of categorisation of ‗tribes‘ based predominantly on aesthetics. The Tutsi were viewed as ‗non-negro‘; more beautiful and intelligent, and more ‗civilised‘ than the conceptualised traditional negroid Hutu. The Tutsi were categorised as ‗Hamites‘, or ‗white coloureds‘, in reference to a fictional genealogical link to Ham, son of Noah, with roots in Christian biblical mythology (Ndayambaje & Mutabaruka 1999). Tutsi power was justified by the European colonisers as part of the natural ‗social Darwinian‘ order; Europeans being the colonisers and indirect rulers, and Tutsi being the direct rulers and purveyors of civility, since they were already half-way there (Amstutz 2006; Destexhe 1995). The Belgian racist categorisation was formalised in 1931 with the introduction of identity cards for all Rwandans which officially detailed each persons‘ ethnicity. In this way, it was the Europeans, or more specifically the Belgians, who introduced the notion of racial differentiation to Rwanda. For the first time, Hutu became aware of a common identity rooted in their supposed inferiority. Conversely, the Tutsi further embraced the already entrenched notion of superiority (Newbury 1998). The absurdity introduced by the Belgians was to lay the scene for Hutu recognition of Tutsis as ―feudal colonialists‖ rather then the Belgians, and eventually Hutu seeking emancipation from Tutsi hegemony rather than independence from Belgium (Ndayambaje & Mutabaruka 1999, p.33). The Belgians removed Mwami Musinga from office in November 1931, and replaced him with his son Rudahigwa. The younger king was seen as being more amenable to the spread of Catholicism, as 373 well as the acceptance of European administration (Ndayambaje & Mutabaruka 1999; Newbury 1988). To this end, the young Mwami changed the tax system, which saw greater distribution to chiefs and sub-chiefs, who were predominantly Tutsi. Consequently, while Rwanda balanced its budget to the delight of the Belgian administrators, social division was exacerbated under this kingship (Newbury 1988). By the 1950s, disenfranchised Hutu intellectuals, while excluded from tertiary education, had found expression through Catholic seminaries, and the intimate contact with the population that provided. The Hutu were finally rising as a political entity. This rise was propelled, firstly, by the publication in March 1957 of the ‗Bahutu Manifesto‘ of the Parmehutu (Parti du Mouvement et de l’emancipation des Bahutu) party, and secondly, by the about-term of the Belgian administration in 1959 in supporting educated Hutu, and re-tagging the Tutsi as ―feudal colonists‖ (Destexhe 1995, p.43). Indeed, the drafting of the Hutu Manifesto by Gregoire Kayabanda (who would later become the president of the First Republic) was strongly encouraged by the Apostolic Vicar of Kabgayi, Monsignor Perraudin (Smith 2006). The Tutsi king, Mwami Rudahigwa, died on 25 July 1959 in Bujumbura, Burundi of a reported brain haemorrhage (Newbury 1988). He had been in power for nearly 30 years, and had represented a sense of stability and moderation. There followed a coup d’etat by radical Tutsis, whereupon the king‘s half-brother Jean-Baptiste Kigeri Ndahindurwa was enthroned as the new Mwami without consultation with Belgian authorities (Jefferson 1992; Ndayambaje & Mutabaruka 1999). The Hutu viewed this as a loss of control by the Belgians, and a sign of a need to prepare for violent confrontation (Newbury 1988). THE FIRST REPUBLIC: 1959-1973 By the end of the 1950s, the stage had been set for majority rule, and the rise of ‗Hutu Power‘. The first manifestation of Hutu emancipation was in 1959. Riots were directed towards Tutsi authority following an attempt on the life of Gregoire Kayibanda, the Hutu leader of the Mouvement Democratique Republicain (MDR). These riots escalated into massacres, which killed 20,000-100,000 Tutsi, and provided a watershed in political authority in Rwanda. About 150,000 Tutsi refugees fled to Uganda, Burundi, Tanzania, and Zaire (Goose & Smyth 1994); those remaining in Rwanda were excluded from education, employment, and every level of government administration (Ndayambaje & Mutabaruka 1999). Unpunished massacres of Tutsi became commonplace from 1959. These were sparked on 1 November 1959 by the actions of a group of young Tutsis who attacked a Hutu sub- chief, Dominique Mbonyumutwa, in Byimana, Gitarama Prefecture. Although he escaped, rumours spread that the sub-chief had been killed (Newbury 1988). By the next day, retaliatory massacres were occurring in Gitarama. These spread readily to other Prefectures, resulting in tens of thousands of Tutsi dead between 1959 and 1961. The Rwandan revolution of 1959-61 abolished the monarchy, and replaced it with a republican government and a popularly elected assembly (Newbury 1988). Independence was declared on 1 July 1962, and thus, the First Republic under President Gregoire Kayibanda, from the southern Gitarama Prefecture, was formed (Destexhe 1995). The pendulum had swung; the Hutu were in power, and determined that the Tutsi would never again return to their traditional exploitative and privileged position (Destexhe 1995; Goose & Smyth 1994). More violence enveloped the country from November 1963 when about 1,500 Tutsi rebels invaded the country from Burundi in an attempt to overthrow the fragile Kayabanda regime (Melvern 2004). Tutsi members of the government were executed, and up to 14,000 Tutsis were killed in the ensuing violence (Melvern 2004; Newbury 1998). By 1964, an estimated 336,000 Tutsi had fled Rwanda (Eltringham 2004). The notion of an ‗internal Tutsi enemy‘ enveloped the dialogue of the Hutu elites, 374 and the derogatory term Inyenzi (cockroach) was coined in reference to the Tutsi enemy within (Smith 2006). THE SECOND REPUBLIC: 1973- APRIL 1994 Gregoire Kayibanda was overthrown on 5 July 1973 by Juvenal Habyarimana in a coup d’etat that initiated the Second Republic. No massacres were evident between 1973 and 1990 (Caplan 2005). For most of this time, Rwanda enjoyed relatively good economic conditions. Coffee prices were high and stable, and the country was free of major climatic catastrophes (Percival & Homer-Dixon 1996). This period of calm seems to indicate that the entrenched ethnic division in Rwanda was not an issue that normally manifested as extreme violence in the absence of other externalities. Despite the apparent calm, however, latent ethnic animosity remained; identity cards still tagged all citizens, and the desire for vengeance for past massacres remained close to the surface (Destexhe 1995). Habyarimana also widened the chasm between Hutu of the north and Hutu of the south. The President, coming from the north, rewarded his fellow northerners to the detriment of both southern Hutu and Tutsi alike (Jefferson 1992). For example, most of the development assistance obtained from the international community was channelled to northern prefectures (Percival & Homer-Dixon 1996). In addition, the real power within the Habyarimana regime increasingly came to reside with a small faction of northern extremists called the Akasu (‗the little house‘), or colloquially known as ‗le clan de Madame‘, in reference to its close association with the president‘s wife, Agathe Kanziga (a descendent of a powerful northern Hutu chief), and her family and close associates (Caplan 2005; Ndayambaje & Mutabaruka 1999). Like colonial administrations elsewhere, the Belgian colonialists insisted that its Rwandan possession be profitable (Newbury 1988). As such, from the 1920s, they directed Rwanda to focus on growing coffee. A heavy dependency on coffee for export earnings was, thus, initiated in those colonial times. However, from 1986, the international coffee market was liberalised, and the established system of country quotas abolished (Ballet et al. 2007). In 1989, coffee and tea accounted for 80 percent of Rwanda‘s total exports (Ballet et al. 2007). Around this time, the coffee price plummeted by 50 percent (Andersen 2000; Watson 1992), exacerbating an already tenuous economic situation. To add to the hardship, the incidence of malaria increased by 337 percent between 1984 and 1987, being the result of record high temperatures and excessive rainfall (Loevinsohn 1994). This placed great pressure on families and family incomes as breadwinners became ill, and scarce finances were stretched with the additional medical expenses. The growing economic hardship during the 1980s was exacerbated by rapidly declining soil fertility, and increasingly regular droughts. The declining soil fertility was caused by excessive deforestation, overcultivation, and consequently, soil degradation and erosion (Percival & Homer-Dixon 1996; van Hoyweghen 1999). In addition, the capricious climate created food shortages, as crops failed on a regular basis, including 1989-90, 1991, and 1993 (Andersen 2000; Destexhe 1995; Hilsum 1994; Pottier 1993). As a result, from the early-1980s to the early-1990s, per capita agricultural output fell by nearly 20 percent (Percival & Homer-Dixon 1996). The decline in food production led to a dramatic decline in the calorie intake of the general population, from an average of 2,055 calories per person per day in 1984 to 1,509 in 1991 (Uvin 1998). So the 1980s was a period in which Rwanda began to suffer increasingly severe environmental distress by way of export earnings, disease, soil fertility, and drought. But even under normal conditions, life in Rwanda was never far from catastrophic. For instance, based on the criteria of a minimum farm size of 0.7 hectare being required to feed an average household of 5 persons, 43 percent of Rwandan farms lacked the minimum land, and hence, lived in a situation of chronic 375 malnutrition (Uvin 1998). Pottier (1993) cites a study in the northern Gisenyi Prefecture in the late- 1970s that found average farm size to be only 0.2 hectare. Indeed, as the Rwandan population increased the phenomena of ―severe demographic stress‖ (Percival & Homer-Dixon 1996, p.270), and ―demographic entrapment‖ (Bonneux 1994, p.1689), prevailed; that is, an overbearing population density entrapped by its country‘s borders. By 1988, land scarcity was provoking increasing social conflict, as well as land disputes that were increasingly difficult to resolve (Andre & Platteau 1998). The period 1980-1985 was also a period of focus for the 250,000 Tutsi refugees living in Uganda. President Milton Obote regime victimised the refugees for being ‗cousins‘ of Yoweri Museveni‘s ethnic group, the Banyankole. The victimisation culminated in the 1984 Luwero Triangle massacres of tens of thousands of Banyarwanda (generically, ethnic Rwandese, but in reality, mostly Tutsi refugees) (Watson 1992). What crystalised in the minds of the Rwandan Tutsi refugees was the dire necessity to find land tenure, and security from oppression. By 1986, the Rwandan Tutsis had assisted Yoweri Museveni to oust Milton Obote from power in Uganda, and by 1987, had constructed the beginnings of an armed incursive force called the Rwandan Patriotic Front (RPF) (Watson 1992). Overall, the year 1990 was the tipping point in the spiral towards genocide in Rwanda. The tipping point hinged on the confluence of three aligning polemics that created profound insecurity for the ruling Hutu elites (Andersen 2000). Firstly, in July 1990 and under pressure from foreign governments, President Habyarimana announced that Rwanda would move towards multi-party democracy. The RPF invasion in October severely undermined this process (Rwandans try to transform war to democracy 1992), creating a fragmentation of the political system and promoted the rise of the radically racist CRD (Coalition pour la Defense de la Republique) party (Andersen 2000). Secondly, in October 1990, the RPF (known in Rwanda as the Inkotanyi) attacked from Uganda. Their forces were estimated at somewhere between 4,000 troops and 15,000 (Rwandans try to transform war to democracy 1992; Hilsum 1994; Watson 1992). Many were the children of the 1959 Tutsi exiles (CIA 2009), and most of the officers were ‗highly placed‘ in the Ugandan army (Campbell 1990; Goose & Smyth 1994); for example, Fred Rwigyema, who led the RPF invasion, was a major-general (Watson 1992). Likewise, Paul Kagame (later to become President of Rwanda) was an officer (Campbell 1990). In addition, more than half of the soldiers were deserters from the Ugandan military, who took with them weapons and supplies (Goose & Smyth 1994; Rwandans try to transform war to democracy 1992). In the meantime, Rwanda‘s society became more militarised. The army expanded from 5,000 troops and police officers in 1990 to over 40,000 by late-1991 (Rwandans try to transform war to democracy 1992; Watson 1992), and large amounts of arms were imported into the country (Uvin 1998). The impact of the RPF attack was devastating. In conjunction with the anti-Tutsi propaganda emanating from the Habyarimana regime, an estimated 300,000 Hutu fled their farms and became internally displaced (Caplan 2005). The war also proved devastating for Rwanda‘s fragile agricultural economy (Rwandans try to transform war to democracy 1992). The RPF attack was perceived as an attempt to reinstall Tutsi power. Latent animosities were reignited, and small- scale massacres of Tutsi ensued; 300 in Kibirira in November 1990; 1,200 in Bagogwe in January 1991; 300 in Bugesera in March 1992; 300 in the north in January 1993 (Destexhe 1995; Jefferson 1992). These were not confined to rural areas. In Kigali, arbitrary and random killings by soldiers became commonplace (Jefferson 1992). Thirdly, in November 1990, the Rwandan Franc was devalued by 40 percent as a result of a Structural Adjustment Program (SAP) enforced by the IMF and World Bank (Uvin 1998). Consequently, inflation rose from 1 percent in 1989 to 19.2 percent in 1991, and consumer prices rose by 54 percent between 1989 and 1993. By 1991, the economic hardship was such that rural households were spending an average of over 80 percent of their income on food (Uvin 1998). 376 By 1992, the Mouvement Revolutionnaire National pour le Developpement (MRND) (i.e., the ruling party of Habyarimana) and the Coalition pour la Defense de la Republique (CDR) (i.e., an extremist anti-Tutsi political party) had each formed radical militia groups. The MRND formed the Interhamwe (‗Those who attack together‘), while the CDR formed the Impuzamugambi (‗Those who have the same goal‘). In total, they numbered 30,000-50,000, and received basic training from the Rwandan army (Destexhe 1994). From this time on, these militia groups were the primary killers of civilians (Hilsum 1994). It was the young, frustrated, and disaffected Hutu men emerging from the chronic living conditions of the 1980s, and mired in economic depression, malnutrition, and down-trodden aspirations, who were most vulnerable to racist propaganda, and consequently, who were to form the backbone of these radical militia groups (Andre & Platteau 1998; Bonneux 1994; Uvin 1998). Ingrained cultural traditions helped fuel the extremism. The traditional culture of Rwanda is one of unquestioning obedience to superiors, and a highly conformist nature (Andersen 2000; Uvin 1998). While not the direct reason for the genocide, the Rwandan culture provided the mechanism for ethnic divisive action by elements of the extremist Hutu ruling elites (Andersen 2000). RPF military advances and pressure applied by foreign governments led to the signing of the Arusha Accord on 9 January 1993 (Melvern 2004; Percival & Homer-Dixon 1996). Sadly, the Accord carried the seeds of its own destruction. The deal struck included issues that would prove explosive, and manifested in violent demonstrations and massacres almost immediately (Geekie 1993). Firstly, the Rwandan government was to accept the repatriation of all Tutsi refugees, which by this time, numbered up to 1 million (van Hoyweghen 1999). Secondly, 40 percent of the combined army was to be made up from the RPF (mostly Tutsi). This issue incensed the officer corps of the Rwandan army (mostly Hutu) since they envisaged this as the pretext for them losing their jobs (Geekie 1993; Rwandans try to transform war to democracy 1992). Thirdly, the power-sharing arrangement in government was to give the RPF and the opposition parties together a two-thirds majority in the 22- member cabinet. This would have been enough to override any initiative invoked by the MRND and its Hutu extremist ally, the CDR (Violence follows peace agreement in Rwanda 1993). While the MRND was a signatory to the Arusha Accord, however, the CDR was not. Habyarimana was then able to operate a ―two-track policy‖ (Andersen 2000, p.450). On the one hand, he could be seen as cooperative with the international peace efforts. On the other hand, he could use the radical militia and the CDR to operate outside the legitimate political system (Hilsum 1994; Wagner 1998). Lemarchand (1994, p.30) noted the ―perverse dialectic‖ between Rwanda and Burundi ―whereby ethnic confrontations in one state have significant side effects in the other‖. This dialectic provided further impetus to Rwanda‘s descent into genocide when, on 21 October 1993, the first Hutu President of Burundi, Melchior Ndadaye was assassinated by the Tutsi-dominated army. Following the assassination, Burundian Hutu massacred thousands of Tutsis; then the Tutsi army retaliated by massacring up to 100,000 Hutu. The massacres resulted in an estimated 375,000 Hutu refugees fleeing Burundi to Rwanda (Melvern 2004). This fuelled the fears of Rwandan Hutu, who were told by the propaganda apparatus that an RPF victory would result in a similar fate for them (Ballet et al. 2007; Caplan 2005; Hilsum 1994; Jefremovas 2000). In addition, the refugees from Burundi were a further burden on Rwanda‘s fragile economy, since these were in addition to the approximately 600,000 internally-displaced refugees who had fled the fighting against the RPF in northern Rwanda from October 1990 (Hilsum 1994). Anti-Tutsi propaganda intensified in the months leading up to the genocide. Most famous was the private radio station called Radio-Television Libre des Mille Collines (RTLM), financed and controlled by the Akasu faction (Caplan 2005), and the ―crudely racist‖ Kangura (‗wake others up‘) newspaper (Berry & Berry 1999b, p.113). These sources of racist propaganda fostered the ―anti-Tutsi psychosis‖ (Keane 1995, p.9) already prevalent among the Hutu population, and provided the means for the dehumanisation of the Tutsis in the months leading up to the genocide (Andersen 2000). 377 The year 1993 became one of increasing militarisation in Rwanda. The civilian Hutu population was armed in preparation for the coming confrontation with the Tutsis. From China, France, and Egypt came machetes, guns, grenades, and land mines, mostly financed by World Bank and IMF loans under the guise of the Structural Adjustment Program (SAP) (Melvern 2004). By early-1994, the Hutu population was physically armed and psychologically primed; the stage had been irreversibly set for extreme violent carnage. GENOCIDE: APRIL-JULY 1994 President Habyarimana‘s plane was shot down by two missiles at approximately 8.30pm on 6 April 1994 while returning from the on-going Arusha negotiations in Tanzania. On the plane also was the new President of Burundi, Cyprien Ntaryamira. Word immediately spread around Kigali that it was the Belgian UNAMIR peacekeepers who had fired the missiles, in cooperation with Prime Minister Agathe Uwilingiyimana (a Tutsi) (Hilsum 1994). As a result, the Presidential Guard abducted 10 Belgian peacekeepers who were guarding the Prime Minister; they were later killed and mutilated. The Prime Minister herself was caught in a UN compound, tortured, mutilated, and finally shot (Kamilindi 1999; Power 2001). The shooting down of the President‘s plane has been described as ―the match to a fuse that had been prepared well in advance‖ (Destexhe 1994, p.4). Almost 1 million people were killed between 6 April and 18 July 1994 (Keane 1995; UN 2007). The most recent official figure is 937,000 dead (Caplan 2005), consisting of over 800,000 Tutsis. This represented approximately 13 percent of the entire population, and 75 percent of Rwanda‘s Tutsi population (Destexhe 1994; Pace 1995; Verpoorten 2005). In addition to the death statistics, hundreds of thousands more were tortured, maimed, and raped; up to 50 percent of all surviving Tutsi women had been raped; 3,000-5,000 children were conceived from rape, and were later referred to as the ―children of hate‖ (Temple-Raston 2005, p.154); many women had been deliberately infected with the HIV virus; 2 million were internally displaced; and, another 2 million had fled to the Congo (1.2 million), Burundi (0.25 million), and Tanzania (0.5 million) (Caplan 2005; Pace 1995; Temple-Raston 2005). A 2001 survey by the Rwandan government found that 54 percent of genocide victims were under 25 years of age; and 81 percent were women, children, or those over 65 years of age. The most common means of death was machete (38 percent), club (17 percent), and firearms (15 percent) (Melvern 2004). Prunier (1995) wrote of the sanctions that were imposed by militia members and local leaders on those Hutu who failed to carry out their assigned genocidal roles. Indeed, perhaps 10,000-30,000 moderate Hutu were killed during the genocide for refusing to partake. The imposition of such sanctions, coupled to the existing interethnic tensions, not only encouraged widespread participation, but also led to a marked escalation in the level of brutality (Bhavnani & Backer 2000). The property of Tutsis was very quickly consumed when it became apparent they were dead (Uvin 1998). Opportunism, within the context of severe economic hardship, cannot be overstated as an influence in the killing of Tutsi by ordinary Hutu (Rummel 1994; van Hoyweghen 1999). Many Hutu used the genocide as a means of acquiring land (Andre & Platteau 1998). Hatzfeld (2005) wrote extensively of the blaze attitudes and opportunistic behaviours of the ordinary Hutu genocide perpetrators. For example, one perpetrator commented that ―killing was less wearisome than farming‖ and ―we returned [from killing] at three o‘clock to have time for pillaging‖ (p.62). The genocide in Rwanda has been described as ―the most brutal, widespread, and systematic killing spree the world has ever witnessed‖ (Uvin 1998, p.49); ―one of the most appalling bloodbaths of the 20 th century‖ (Lemarchand 2000, p.1). In comparison, the Jewish and Armenian Holocausts, while well-organised from above, experienced far less widespread participation, and killed far smaller proportions of the entire respective populations over longer periods of time (Amstutz 2006; Power 378 2001; Uvin 1998). Indeed, perhaps up to two-thirds of all the Tutsis massacred (that is, over 500,000) died in the first 3 weeks (Kuperman 2000). POST-GENOCIDE RECONCILIATION: FROM JULY 1994 Following the genocide, the international community established the International Criminal Tribunal for Rwanda (ICTR) in Arusha, Tanzania. The responsibility of the Tribunal was to prosecute the most complicit of those who organised the genocide. In Rwanda, and commencing immediately after the genocide, the courts attempted the immense task of prosecuting the arrested genocidaires. By 2004, 5,500 perpetrators had been convicted, indicating that, at that rate of conviction, it would likely take over 200 years for all the accused genocide perpetrators to stand trial (Corey & Joireman 2004). Given the focus of the ICTR on high-profile perpetrators, and the tortuous delays evident in the Rwandan judicial system, the government launched the gacaca court system in June 2002. Gacaca is a Kinyarwanda word meaning ‗justice on the grass‘. In pre-colonial times, the gacaca system was used to resolve local disputes over family matters, property rights, and other local issues between individuals. Village elders and disputants would voluntarily gather on an area of grass to discuss the disputes. The current use of gacaca for genocide perpetrators differs in three ways from the traditional use; firstly, the traditional system was voluntary; secondly, it was used to deal with minor disputes; and thirdly, the elders/judges could exact any punishment they deemed appropriate (Corey & Joireman 2004). The gacaca system as applied to the perpetrators of the genocide was not voluntary; was used to deal with crimes of theft, looting, destruction of property, and murder; and the punishment was restricted to community service and imprisonment. At the beginning of 2003, there were up to 125,000 accused perpetrators awaiting trial in Rwandan jails (Corey & Joireman 2004). Lemarchand (2000) suggested that 40 percent were probably innocent. In January 2003, 40,000 of the 125,000 were released from the prisons either because they were old and infirm, or because they had confessed to minor crimes and consented to ‗re-education‘ before being returned to their villages (Temple-Raston 2005). Gacaca trials for alleged genocide crimes were supposed to have been completed by end-2007. Approximately 1 million suspects (about 10 percent of the entire population) have been brought before gacaca courts; in January 2008, 80,000 cases still remained unresolved (Rwanda politics: More time needed to finish gacaca 2008). The gacaca process has been strongly criticised by Ibuka (‗remember‘), a genocide survivors‘ association created in 1995. Ibuka alleged the intimidation of prosecution witnesses, the imprisonment of survivors, and the protection of well-connected Hutu. Ibuka further commented that gacaca had failed to achieve national reconciliation, but had instead, left survivors and perpetrators as far apart as ever (Rwanda politics: More time needed to finish gacaca 2008). For example, a genocide survivor commented that (Kavubi 2006, p.70): ―Sometimes they ask us to convict them in gacaca courts…, but when you go there and point out someone who attacked you with a machete, they say you are a liar… And on your way back home, you might be ambushed and beaten.‖ Another survivor recounts (Uwamungu 2006, p.241): ―They [the prosecutors] told me to come back that Wednesday at 9:00a.m. I went back on my bicycle, but on the way I was stoned by people I didn‘t know…Since then I‘ve never been back to follow up the case. Most of the killers are still free in Butamwa and one of them is a local leader.‖ Indeed, a number of genocide survivors have been killed since the gacaca trials began (Mutesi 2008; Uwazaninka 2006). In addition, reprisal killings and extrajudicial executions have been evident, most often perpetrated by Rwandan police. However, perhaps the most disturbing aspect of the survivor deaths and reprisal killings has been the reaction of the government. The focus is placed on finding 379 the killers of the survivors, with little effort imposed on convicting police officers for the reprisal killings (HRW 2007b) A major problem with the gacaca system has been highlighted by a number of authors (see, for example, Corey & Joireman 2004). The problem is that the Gacaca process is restricted to Hutu perpetrators and Tutsi victims. Hutu victims of Tutsis seeking revenge, and those of RPF massacres and summary executions during and after the civil war (HRW 1999), have no right of jurisdiction under the gacaca system. The system is, thus, exclusionist and politicised, and re-establishes the ethnic divide by the unequal application of the law (Corey & Joireman 2004; Temple-Raston 2005). Consequently, the gacaca process may easily be interpreted as the seeking of revenge, rather than reconciliation. In Addition, Hutus fear speaking out against the gacaca system since they may be condemned as genocidaire sympathisers, and subsequently, tried for divisionalism. METHODOLOGY The method employed for the present study was qualitative. Data were collected by way of interviews conducted in Kigali during the period 2007-8. The respondents included 55 business owners/managers, representing a variety of private business sectors including hotels, handicraft workshops, medical clinics, banks, car dealerships, general retail traders, coffee exporters, and manufacturers of such products as paints, plastic products, and beer; 9 government officials representing the Ministry of Local Government, Ministry of Finance and Economic Planning, Ministry of Public Service and Labour, Ministry of Health, Rwanda Investment and Export Promotion Agency (RIEPA), Rwanda Development Bank, Rwanda National Police, OCIR The (tea growers association), and National Unity and Reconciliation Commission; and, 2 representatives of genocide survivors associations from Ibuka and AVEGA Agahozo. The respondents represented a broad cross-section of Rwandan society, in terms of gender (60 percent male; 40% female) and age (36percent <45 years; 60 percent 46-55 years; 4 percent >55 years). The education level of the respondents (30 percent secondary; 40 percent tertiary; 30 percent postgraduate) suggests that they are generally more educated, since the average school life expectancy in Rwanda is only 9 years (CIA 2009). Some of the respondents had fled Rwanda prior to the genocide, and returned later; others remained in Rwanda during the genocide, and were thus, genocide survivors; and still others returned after the genocide as ‗old caseload‘ returnees. This latter group was descendant from the Tutsi refugees who fled to Uganda, Burundi, Tanzania, and Zaire from 1959 (Goose & Smyth 1994; van Hoyweghen 1999). The respondents were interviewed in either English, or the Kinyarwanda language using a semi- structured interview schedule. Responses from those conducted in the Kinyarwanda language were subsequently translated by the Rwandan research assistants. The interview questions focused on the immediate and continuing impact of the 1994 genocide on Rwandan society, business relationships, and the management of business enterprises. RESULTS The results of the study are described in two sections. Firstly, the responses are indicated for the immediate impact of the genocide on private-sector business enterprises. This is the 1-2 year period immediately following the end of the genocide from July 1994. Secondly, a section is provided that elicits from the respondents their impressions of the continuing impact of the genocide on private- sector business enterprises in 2007-8, and which they feel will likely continue into the future. Immediate Impact of the Genocide on Private-Sector Business Enterprises 380 A number of issues were reported as having impacted on private-sector business enterprises in the immediate aftermath of the genocide. These issues are described next. Loss of Human Resources In general, there was a massive loss of human life. The skill base of Rwanda was essentially decimated. Intellectuals, and the educated, were particularly targeted because most were Tutsi. Hodgkin (2006) noted that 75 percent of the teachers in Rwanda in 1994 were either killed, or were subsequently imprisoned for participation in the genocide. Many doctors were also complicit in the killings (Mamdani 2001; Mupenzi 2006). Dr Claude-Emile Rwagaconza was at University Hospital, Butare on 20 April 1994. He reported that ―some of the doctors were colluding with the extremists; they expelled [the patients] and chased them out of the hospital to be killed‖ (Ramsey 1994, p.1011). One government official who was a respondent to this study reported that, in 1995, about 80 percent of civil servants had not completed secondary school; another reported that many senior government officials had fled to other countries having looted government resources. From the point of view of the business owners/managers, employees had either died during the genocide, had fled from Rwanda, or were in prison because of their involvement in the killings. Loss of Property There was widespread destruction of both private and public property. Schools, hospitals, churches, and healthcare centres were burnt and destroyed by the Rwandan army and the militia groups. For private businesses, stock, machinery, and equipment were looted. For example, a plastics manufacturer lost all stock and machinery, and was unable to acquire sufficient finance to restart operations until 2002. Likewise, the local brewery was reported to have lost 95 percent of equipment and materials. Similarly, a local soap and plastics manufacturer reported that sales declined 97 percent during the genocide. In addition, bank documents were targeted for destruction, since this resulted in no remaining record of bank loans; in addition, bank money was stolen and taken to the Congo. Respondents noted the opportunistic behaviour of genocide perpetrators, taking the opportunity to settle old scores and acquire the property of victims. Loss of Agricultural Production A number of respondents mentioned the acute shortage of food following the genocide period. In the immediate aftermath of the genocide, most villages in the country were deserted. Two million people were internally displaced. Another 2million had fled to the Congo (1.2million), Burundi (0.25million), and Tanzania (0.5million) (Caplan 2005; Pace 1995; Temple-Raston 2005). Most of the internal and external refugees were farmers who were the mainstay of agricultural production. Destruction of Trust and Social Cohesion Post-genocide trust between the ethnic groups was understandably destroyed. Respondents reported that the management of mixed ethnic workgroups was essentially impossible in the aftermath of the genocide. Most worktime was spent in discussion and interrogation; Tutsis were intent on knowing what Hutus had been doing, and whether they had been involved in the killings. A hotel owner reported that the incidence of poisoning was high in the period following the genocide. As a result, the hotel industry was severely affected because most people would eat at home. Continuing Impact of the Genocide on Private-Sector Business Enterprises In addition to issues impacted on private-sector business enterprises in the immediate aftermath of the genocide, the respondents to the present study also highlighted a number of issues that continue to impinge on the economic and social progression of Rwanda. These issues are described in this section. Lack of Trust and Social Cohesion 381 The respondents caste doubt over the reconciliation process. At the most fundamental level, reconciliation implies that genocide survivors have the capacity to forgive their rapists, the murderers of their families, and the perpetrators of atrocities committed against their ethnic group. On the other hand, reconciliation also implies that the perpetrators feel genuine repentance for what they have done, and seek genuine forgiveness from those they have harmed (Straub et al. 2005). Sadly, the respondents suggested that neither implied aspect of reconciliation is evident in Rwanda. As such, the dominant focus of reconciliation has now become ‗coexistence‘, in which the need for victim forgiveness and perpetrator repentance has been replaced by mutual fear, distrustful relations, and wary cohabitation. Continued Ethnic Animosities and Violence Respondents noted the alarming incidence of ethnic hatred and violence, especially outside of Kigali. One respondent quoted a caller to Radio Rwanda talkback on Memorial Day 2007 (i.e., 7 April). Before being cut-off, the caller said: ―Even if you remember those dogs [Tutsis] 1,000 times, we shall never stop until we kill them‖. Another respondent noted that genocide survivors are still being killed and their property burnt, often by perpetrators of the 1994 genocide who fear being accused by the survivors. Ethnic Discrimination Respondents noted discrimination in the workplace as a continuing legacy of the lack of social cohesion in Rwandan society. People are often employed based on ethnic connection, rather than work or managerial capacity. At other times, it was reported, government authorities sabotage businesses owned by a member of the other ethnic group. This could be done, for example, by delaying the registration of a new business. Another respondent indicated that the general public, too, are often discriminatory in the goods that they purchase, often purchasing from a business owner from the same ethnic group. These discriminatory practices, borne out of prejudice and distrust, impacts on business performance, and promotes ethnic cleavage in the society. Strong Political Control A number of respondents highlighted the necessity in the immediate aftermath of the genocide for the new government to maintain strong control over Rwandan society. Indeed, because of the general failure of reconciliation and the continued lack of social cohesion, the government feels the necessity to maintain strong control over ‗divisionalist‘ expression and alternative political party activity. However, respondents also noted longer-term implications of maintaining such strong and ―heavy- handed‖ political control, suggesting that insecurity and grievance may be exacerbated, and that it may ultimately be interpreted merely as ―radical political tools‖ for the sake of continued hegemonic control. Lack of Human Resources Some of the respondents indicated that the loss of human resources at the time of the genocide still resonates across Rwandan society. Many skilled people were killed, fled, or imprisoned. The country has not had sufficient time since to regenerate the stock of human resources that were lost. As such, the respondents indicated that the lowly educated and unskilled workforce is problematic for the performance of businesses enterprises. International Community Perceptions A number of respondents suggested that the genocide had created an adverse image of Rwanda in the eyes of the international community; an image that suggests Rwanda is savage and wild, with little hint of humanity; one respondent indicated it was a ―shame to the country‖. This image has been further invoked by the foreign media since the genocide, and continues to inhibit regional and international trade, investment, and tourism because of the distrust created. 382 HIV/AIDs An estimated 11 percent of all women were raped during the genocide (http://www.statistics.gov.rw).The Ibuka representative reported that over two-thirds of genocide widows were raped. Many rape victims were infected with the HIV virus, often deliberately; 3,000- 5,000 children were conceived from rape, and are often referred to as the ―children of hate‖ (Temple- Raston 2005, p.154). As a consequence of the HIV infections, propagation within the society is significant, and the resultant sickness remains an economic and psychological burden on Rwandan society. Orphaned Children There were over 1.2 million orphans created in Rwanda as a consequence of the genocide (National strategic plan of action 2006); many parents were killed; many more were jailed as perpetrators; many of the children remain with psychological scars from witnessing or perpetrating acts of rape, murder, and/or atrocity. According to an Organisation of African Unity report (OAU 2000), over two-thirds of all Rwandan children saw someone killed or severely wounded, over 50 percent with machetes, and 70 percent had a close relative killed. Hutu children also participated in the killings either directly, or indirectly in support roles (Mamdani 2001). Odette Umulisa (2006, p.229) writes that her young sister was ―…killed by other children – the oldest in the group that took her must have been about 13‖. A 2002 study by UNICEF found that there were about 7,000 street children in Rwanda, of whom 3,000 were in Kigali (http://africagrassroots.org). The respondents to the present study reported that street children are still numerous, and that they are a lost resource for the country, since they are not attaining any education. Increasing Population Density Many of the respondents pointed to the potential future dysfunction of the increasing population of Rwanda. There was a significant increase in the population growth rate following the genocide because, according to the respondents, people generally had a sense of hopelessness, little to do with their time, and lacked any knowledge of family planning. The respondents were all too well aware that, unless agricultural productivity can keep pace with population growth, the economic and social burden of population will become increasingly problematic for Rwanda. Intermarriage There were mixed responses to the issue of the incidence of intermarriage between Hutu and Tutsi. Some argued that intermarriage was rare. Others suggested that the incidence had been increasing, while still others suggested that intermarriage was mostly constrained to the educated and ‗old caseload‘ returnees. Outside of these groups, many Rwandans still identify themselves along ethnic grounds, and as such, would never marry a member of the other ethnic group. Regional Instability The Hutu-Tutsi ethnic cleavage is not unique to Rwanda. Indeed, it is a regional phenomenon that has enveloped Rwanda, Burundi, and the Congo in episodes of violent upheaval since 1959. In addition, many of the Hutu militia who perpetrated atrocities during the genocide in Rwanda, fled to the Congo in 1994. The respondents suggested that their continued presence in the Congo, as well as their hate- based and divisive ideology, provides a destabilizing influence for Rwanda and the region. DISCUSSION AND CONCLUSIONS The historical context provided in the present study highlights the fact that the 1994 Rwandan genocide was the result of a cumulative series of historical episodes and events, rather than prompted by a single action or situation. The road to genocide commenced in the 19 th -century as the Tutsi Mwami system increasingly took control of access to land, cattle and people amidst growing population density. This situation was exacerbated in the early 20 th -century as Belgian colonial occupation promoted European racist theories. Following decolonisation, successive Rwandan elites 383 deepened the ethnic cleavage between Hutu and Tutsi, dehumanising those not in power, and subsequently, justifying violence against them. The immediate factors which influenced the 1994 genocide were the invasion of Rwanda by the Tutsi RPF; severe economic depression; political and economic restructuring imposed by external agencies; the actions of Hutu extremists; and long-held and institutionalised socio-psychological racist prejudice that infiltrated the minds of the majority of the polarised population. By the beginning of 1994, Rwanda was firmly entangled in a ―Malthusian trap‖ (Andre & Platteau 1998, p.2) from which extreme violent carnage became the only apparent means of escape. The 1994 Rwandan genocide resulted in the death of nearly 1 million people during a 104 day period, often in the most brutal of ways. It is hard to imagine a more catastrophic event to undermine social cohesion. In the aftermath of the genocide, Lemarchand (2000, p.1) observed Rwanda as ―a land haunted by the ghosts of a senseless carnage‖. More recently, Caplan (2005, p.16) claimed that Rwanda remains ―terribly poor, badly traumatized, deeply divided, a precarious entity in a fragile and explosive region‖. The results of the present study highlight the underlying trauma in Rwandan society, and the continued distrust and ethnic cleavage that promises to destabilise any economic and socio-psychological progress. The results of the study point to the immediate impact of the genocide on private-sector business enterprises as catastrophic loss of human resources and agricultural production, massive destruction of property, and the decimation of trust and social cohesion. Fourteen years after the genocide, the results of the study proffer substantial lingering issues that Rwandan society has yet to address. The respondents noted the continued distrust and social alienation between the ethnic groups, giving rise to discrimination and incidents of violence. Social problems remain, such as HIV/AIDS, orphaned children, and reconciliation between genocide survivors and perpetrators. Meanwhile, brutal militia groups in the Congo provide an ever present reminder of past carnage, and an inescapable sense that Rwanda might again be consumed by old animosities. Rwanda has long embraced a political system governed by a philosophy of winner-take-all for the victors, and death or flight for the losers (Newbury 1998; Vansina 2004). It may be argued that much the same has occurred since 1994. The term ‗survivor‘ is one that has been reserved for only the Tutsis who were victims of the Hutu. As such, the term ‗perpetrator‘ has become the sole domain of the Hutu, and since there is a general perception that any moderate Hutu who opposed the genocide was killed, then all remaining Hutu must be perpetrators and genocidaires. Unfortunately, this course continues to perpetuate injustice and ethnic division by the inability to conceive that the Tutsi and Hutu groups are each combinations of victims, survivors, and perpetrators, of not only the 1994 genocide, but of all episodes of violence since 1959. In terms of economic development since 1994, Rwanda remains one of the poorest countries in the world, with a per capita GDP of US$1,000; a growing economic gap between the vast peasant majority, and a small privileged elite; over 60 percent of the population existing on less than US$1 per day; and average life expectancy of 49 years (Caplan 2005; CIA 2009; UN 2007). The present study has shown that 400 years of historical circumstance has deeply ingrained a socio- psychological prejudice that cannot be readily eradicated. 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[email protected] ABSTRACT Small firms have long been touted as a driving force for economic development by way of entrepreneurial innovation, and the employment opportunities created. In this context, the efficiency of the small firm sector should be of paramount concern to governments, particularly those with the responsibility of delivering economic growth and improved living conditions to the citizens of less developed countries. This paper presents the results of a study which sought to explore the short-term impact of the 2008 global economic recession, as well as the longer-term business constraints that impact on the efficiency and potential for growth for small firms in Vietnam. To this end, the study focused on the retail clothing industry as a basic barometer of the health of the Vietnamese economy. The results of the study suggest that the global economic recession produced a decline in sales of 20-50 percent (average 32 percent) over the same period the previous year. The results further indicate that a number of constraints to the performance of small firms were common. These include strong competition, government taxes, poor infrastructure, and lack of skills of both employees and owners. Keywords: Small business; economic recession; business constraints; retail clothing; Vietnam INTRODUCTION The development of a vibrant and efficient private business sector is of critical importance in the quest to deliver sustainable economic growth and rising living standards to any society (Ramachandran & Shah 1999). In support of an efficient private sector, there are many factors that influence sustained economic growth, including geography, education, access to land and finance, and infrastructure (Bleaney & Nishiyama 2002). In addition, entrepreneurial activity and effective small business has often been proffered as an important mechanism to promote employment, productivity, and innovation, and hence, progress economic development (Daniels & Mead 1998; Klapper & Delgado 2007; Spencer & Gomez 2004; van Praag & Versloot 2007). As such, most governments recognise the significance of the small business sector, and consequently, place great emphasis on promoting this sector of the economy (Daniels & Mead 1998). In the case of Vietnam, small firms generate 53 percent of gross domestic product (GDP), and account for 70 percent of total employment and 90 percent of new job creation (Small and medium enterprises‘ week to launch in Hanoi 2008). 389 However, constraints to small firms often impact on their efficiency, and potential for growth. These constraints include unfair competition from the informal sector, poor infrastructure, lack of access to finance, low productivity of human resources, inequality in tax administration, and corruption (Kellow 2007; UNCTAD 2006; UNCTAD 2007; World Bank 1993). In addition to the longer-term business constraints, the world entered a period of global economic recession in 2008. While the effects of the recession on large economies have featured prominently in the media and academic writing, less developed countries have also been heavily impacted as collateral damage from reduced export markets. This paper will explore two issues involving small firms in Vietnam. Firstly, the immediate impact of the 2008 global economic recession; and secondly, the longer-term business constraints that impose limitations on both efficient operation, and potential for future growth. The paper will begin by briefly reviewing the background to the global economic recession, as well as the effect of the recession on Vietnam. The nature of small firms in Vietnam will then be outlined, before presenting the methodology, results, and a discussion of the findings. THE 2008 GLOBAL ECONOMIC RECESSION Following a period of economic boom, a global financial crisis was precipitated in late-2007 by a collapse of the securitised US sub-prime mortgage market (Loftus 2008). The epicentre was on Wall Street, and was driven by the rampant greed of financiers and inadequate government regulation (Gould 2008; Krugman 2008). This event had a global ripple effect, which subsequently resulted in falling world stock markets, the collapse of financial institutions, a plethora of government rescue packages to bail out distressed financial systems, and widespread economic recession (Shah 2009). During 2008, the global economic recession impacted heavily on country institutions and economies; 58 banks collapsed or merged, bank write-downs reached US$2.8trillion, and imports/exports worldwide declined rapidly (IMF 2009; OECD 2009). EFFECTS OF THE GLOBAL ECONOMIC RECESSION ON VIETNAM Given the connectedness of world economies, Vietnam could not remain isolated from the global economic recession (Lombra 2009; Nguyen 2009). Consequently, Vietnam‘s gross domestic product (GDP) growth rate declined from 8.5 percent in 2007 to 6.2 percent in 2008. Likewise, exports fell by 24.5 percent, due mainly to shrinking demands in the US, Europe, and Japan (Pincus 2009; Vietnam: An On-The-Ground Perspective 2009). Furthermore, tightening global credit reduced the inflows of foreign direct investment (FDI) to Vietnam. For instance, FDI in the first quarter of 2009 was only 30 percent of the FDI for the same period in 2008. In addition, domestic consumption declined as a result of job cuts and wage reduction. There were 500,000 job losses in 2008, leading to an unemployment rate of 5.6 percent (Vietnam: An On-The-Ground Perspective 2009, 2). SMALL FIRMS IN VIETNAM Prior to 1986, the Vietnamese economy had suffered grievously from institutional weaknesses, and isolation from global trade. Most government financial support was provided to large state-owned enterprises (SOEs), which were highly inefficient in their operation (Farrell and Downing 1997). To revive the parlous state of the economy, the Vietnamese government introduced a reform programme known as Doi Moi (‗open system‘) in 1986. The open policy abolished central planning, and enabled increased exports and 390 inflows of FDI (Mansurel and Smit 2000). The government also started to support non-SOE sectors, especially privately-owned small firms (Phan 2008a, 2008b). By 2007, Vietnam had 332,500 privately-owned small firms, and the number was growing at an annual rate of 20 percent (Tran et al. 2008). The vast majority of Vietnamese small firms are family-based (Meyer, Tran and Nguyen 2006; Pham 2009). Significant proportions of the total number of small firms are located in the main commercial centres of Ho Chi Minh City (HCMC) (25 percent) and Hanoi (15 percent), while no other city has more than 4 percent (Tran et al. 2008; Asian Development Bank 2009b). As is the case in any country, Vietnamese small firms are an important factor in the growth of the country‘s economy. These firms generate 53 percent of GDP, and account for 70 percent of total employment and 90 percent of new job creation (Small and medium enterprises‘ week to launch in Hanoi 2008). As a consequence of the global economic recession, 7,000 small firms were dissolved, and another 3,000 ceased operation in 2008 (Phuoc 2009). According to research conducted in late-2008, 80 percent of small firms had financial problems, having suffered substantial decline in income (Many SMEs will go into bankruptcy 2009). Since nearly 90 percent of the output generated by small firms in Vietnam serves the domestic market, the direct impact of the economic recession was more likely through weak domestic demand and higher unemployment, rather than a decline in exports (Asian Development Bank 2009a). BUSINESS CONSTRAINTS ON SMALL FIRMS IN VIETNAM While the global economic recession provided a short-term challenge for small firms in Vietnam, there are also longer-term business constraints that compound the recessionary effects, and affect efficient operation and potential for growth. The major constraints on business in Vietnam are identified next. Limited accessed to finance Small firms in Vietnam have historically faced credit constraints for three reasons (Farrell and Downing 1997; Kokko and Sjoholm 2006; Rand 2007; Thomsen 2007). Firstly, there is substantial requirement of collateral for the granting of credit. For example, banks often require collateral worth 100-300 percent of the value of the loan. Secondly, bank loan procedures are complicated, costly, and time consuming. Thirdly, poor quality business plans from uneducated borrowers discourage banks from lending. Consequently, less than 7 percent of small firms in Vietnam use bank credit to start up or finance their businesses (Asian Development Bank 2009b). Complex and time consuming registration procedures A plethora of regulations and overlapping procedures make registration for business start-up in Vietnam very time consuming (Karkoviata 2001). It may take 50 days to go through 11 procedures before receiving approval for starting a business; this compares to the world average of 43 days, and only 3 days and 2 procedures in Canada (Ngo 2006). The reason for such inefficiency is the complex administrative system, lack of consistency in legal documents, and often intentional obstruction to provide opportunity for corrupt payments (Costs of doing business in Vietnam ranks no.1in the region 2008; http://www.heritage.org/Index/country.cfm?id=Vietnam). 391 High operating costs Regardless of Vietnam‘s cheap labour cost, other operating costs are often much higher than in other Asian countries (UPS Snapshot for Small Businesses: Doing business in Vietnam 2008). These costs include property rent, and costs of electricity, telecommunications, and logistics. For example, in HCMC, the rental cost of a 32-40 square metre shop in a recognised commercial area is perhaps US$4,000 per month (High operating expenses limit capablilities to attract investment 2005). Inflation Inflation is normally high, averaging 7.7 percent between 2004 and 2006. In September 2008, it reached 28 percent. High inflation is detrimental to business for two reasons. Firstly, it weakens domestic demand; and secondly, it results in higher priced raw materials. Consequently, small firms suffer from both lower sale volumes, and higher operating costs. Furthermore, higher interest rates (usually associated with higher inflation) hinder the ability of small firms to access bank finance (Pincus 2009, 12-14; Solving problems facing Vietnamese SMEs 2008). Lack of skills and education Workers employed by small firms are predominantly unskilled and lowly educated (Kokko and Sjoholm 2006; VBF 2007), resulting in low productivity and increased labour costs (Vietnam economy: Education is a major concern 2009). A 2008 World Bank survey found that the quality of the Vietnamese workforce ranked 11 th in a total of 12 Asian countries. Vietnam‘s labour productivity was evaluated lower than Indonesia, Thailand, and the Philippines, and overall, ranked Vietnam 77 th among 125 nations globally (Denney 2008). In addition, most owners of small firms are hamstrung by poor management skills, little knowledge of new technology, and failure to apply effective human resource management practices (Hiemstra et al. 2006; King-Kauanui et al. 2006; Mansurel and Smit 2000; Nguyen 2007; Nguyen and Bryant 2004; SMEs vital for economy, but short of cash 2009). Poor infrastructure Despite the Government‘s efforts to improve the country‘s infrastructure, most small firms view the current infrastructure as inadequate, arguing that narrow and deteriorated roads cause traffic jams that delay the delivery of products and raw materials. In addition, power and water outages are common, greatly affecting productivity (Meyer et al. 2006; VBF 2007). GOVERNMENT INTERVENTION FOR SMALL FIRMS IN VIETNAM Recognising the importance of small firms to the national economy and the constraints they face, the Vietnamese Government made a commitment from the early-2000s to support small firms by reforming the financial system (Hiemstra et al. 2006; Kokko and Sjoholm 2006). The Government issued Decrees in 2001, 2004, and 2006 in support of small business. These Decrees led to the establishment of the SME Development Fund, Credit Guarantee Fund, the Human Resource Training Support Program 2004-2008, and the Five-Year SMEs Development Plan 2006-2010. These initiatives were aimed at enhancing the competitiveness of small firms by improving the knowledge of both owners and employees, creating a more conductive business environment, and encouraging technology transfers among enterprises of different size (Tran et.al. 2008). The Government‘s major agency of SME support is the 392 Agency of Small and Medium Enterprises Development (ASMED). This agency is charged with helping the Government develop policies to support small firms development, organising training courses, and advising and facilitating access to new technology and equipment (Tran et.al. 2008) To assist small firms cope with the impact of the 2008 global economic recession, the Government initiated tax and interest rate cuts, and established special credit funds for small firms. The Government also lengthened the payback period for both old and new loans. In addition to increasing the amount of credit available, the Government also implemented various capital mobilisation programs to boost domestic consumption (Hong 2009). These programs included tax reductions, subsidies for loan interest, increase in public investment, social security support, and a number of economic stimulus packages (Central bank, economists discuss interest rate subsidies 2009; Vietnam coping with global recession "reasonably well" - ADB economist 2009). In 2009, the Vietnamese government issued a new decree in support of small firms. Specifically, newly established businesses may operate tax free for 2-4 years, as of the first profitable fiscal year, and will receive 50 percent tax reduction for the next 4-9 years. Furthermore, the government has encouraged financial institutions to establish credit guarantee funds for small firms, and provide supportive services such as financial counseling and investment management. Importantly, the Prime Minister also emphasised the need to establish plans to assist in the education of human resources, especially focusing on business administration (Decree about developing SMEs 2009). In order to address the poor infrastructure, the Vietnamese government has tried to attract and encourage both domestic and foreign investment in the upgrade of transportation infrastructure by issuing tax incentive policies and ensuring the legal interests of the investors (Transportation Infrastructure Development in Vietnam 2009). The government has also been working towards addressing the complexity of business registration. Since late-2008, prospective business owners have been able to register their applications via the internet, which has reportedly reduced the registration period to 14 days (Nguyen 2008). THE RETAIL CLOTHING INDUSTRY IN VIETNAM Vietnam‘s retail clothing industry is embedded within the global economic recession, business constraints, and government initiatives as described in the previous sections of this paper. This section now describes the specific characteristics of the retail clothing industry. The retail clothing industry had been growing at an average rate of 15 percent per year during the period 2000-2007. In 2007, clothing sales accounted for 16.5 percent of total retail sales. The sales were derived through two forms of retail outlets; ‗traditional‘ and ‗modern‘. ‗Traditional‘ retailers include formal-sector privately-owned retail clothing shops located in markets or with street frontage, as well as informal-sector street vendors. On the other hand, ‗modern‘ retailers are those who operate through large department stores. Traditional retailers account for about 80 percent of all clothing sales (Vietnam Retail Analysis (2008-2012) 2008). 393 Most traditional clothing retailers sell Chinese-made clothes (Discount garments fail to find buyers 2008). In 2007, 40-60 percent of sales was generated from Chinese clothes, while sales of domestic clothes accounted for only 25 percent (Vietnam loses clothing-market share 2008). Vietnamese consumers appear to prefer Chinese clothes because of the vibrant colours, superior design, and cheaper prices. A shirt made in China may cost only US$1.8- 2.5, while a Vietnamese-made shirt may cost at least US$6. Street vendors often sell second- hand clothes coming from China. These clothes are extremely cheap (about US$0.5-0.6 per item), and their consumption is high in rural areas (Vietnam Retail Analysis (2008-2012) 2008). Competition is intense. Clothing retailers normally sell very similar products, and locate themselves very near to each other, or even next door (Vietnamese retailers brace themselves for the inevitable 2008). The fashion industry is often perceived as a very profitable business sector, especially as living standards rise and disposable income increases. According to the Business Studies and Assistance Center (BSAC), 70 percent of urban Vietnamese consumers buy fashion products each month, and their spending for those items accounts for 18 percent of total monthly expenditure (Domestic fashion: weaknesses in distribution and designing stage 2008). Such strong consumer demand has exacerbated competition with strong growth in the number of small firms involved in the retail clothing industry (Vietnam retail analysis (2008-2012) 2008). METHODOLOGY The retail trade industry, in general, and the retail clothing industry more specifically, is usually considered a good barometer for the prevalent economic conditions in a country (Wickham 2009). This is especially the case in Vietnam where expenditure on clothing is high (Domestic fashion: weaknesses in distribution and designing stage 2008). Consequently, the retail clothing industry was purposely selected as the focus for the present study in order to gain an insight into business constraints, and the impact of the global economic recession on the Vietnamese economy. While there is no universally accepted definition of a small firm (Burns 2007), the most commonly used metric is the number of employees (Harvie and Lee 2002). As such, a ‗small enterprise‘ has been defined as one that employes <20 people (Harvie and Lee 2002). There is often a distinction made between service and manufacturing firms; for example, in Australia, small service firms are defined as those employing <20 people, while small manufacturing firms are those employing <100 (Harvie and Lee 2002). For the present study involving the retail clothing industry (i.e., services), ‗small firm‘ was defined as one employing <20 workers. The sample for the study consisted of 30 ‗traditional‘ retail clothing stores (formal sector businesses) in central Ho Chi Minh City (HCMC). The stores were located in the following districts/streets: Nguyen Trai, Le Van Sy, Ngo Nhon Tinh, Nguyen Van Dau, Le Quang Dinh, Ly Thuong Kiet, Hoang Van Thu, and Nguyen Dinh. The sample group of small firms employed 4-15 workers. Sixty (60) percent of owners had been in business for more than 10 years; 80 percent had started the business themselves, while the remaining 20 percent succeeded the business from their parents; 77 percent were female; 73 percent were over 30 years of age; and, 80 percent had high school education only. 394 Data were collected in August-September 2009, using a qualitative approach by way of semi- structured interviews. The interview schedule included questions on business characteristics, owner demographics, employees, perceptions about the impact of the global economic recession, and views regarding other local factors that affect the efficiency of business operations. The interviews were conducted in the Vietnamese language; responses were recorded in writing, and then translated into English by research assistants. On average, interviews lasted about 20 minutes. RESULTS All respondents to the present study recognised the impact of the global economic recession on company sales. Respondents reported that January-August 2009 sales had declined by 20- 50 percent (average 32 percent) over the same period for 2008. These figures are consistent with other studies in other Asian countries subject to the global economic recession (see, for example, Egan & Tosanguan 2009 for the case of small firms in Thailand). In an attempt to cope with the decline in sales, the respondents to the present study used sales discounts (30- 50 percent) to increase cash flow, and reduced costs by reducing the amount of inventory. No respondent mentioned employee layoffs as a response to the recessionary effects. All respondents to the study owned the shop from which they operated their businesses. 83 percent of the respondents to the study reported that the start-up of their businesses was financed with personal capital. The other 17 percent utilised ‗personal networks‘ to obtain the required capital. This finding is indicative of the general problem of the limited access to finance for small business owners as observed by other authors (for example, Asian Development Bank 2009b; Farrell and Downing 1997; Rand 2007; Thomsen 2007). The respondents reported that the most serious business constraints, beyond the immediacy of the global economic recession, were (in rank order of significance): 1. Strong competition 2. Government taxes 3. Poor infrastructure The most serious concern for the clothing retailers of HCMC was the high level of competition. For example, numerous clothing retailers are located next to each other on Nguyen Trai and Le Van Sy streets offering various choices to customers. The second most significant concern was tax burden. Respondents said they were subject to four different taxes; income tax, license tax, rental income tax, and pavement charge. For instance, one typical shop owner paid out US$390 per month for the four taxes, including US$150 income tax, US$15 license tax, US$180 rental income tax, and US$45 pavement charge. Rental income tax was reported to vary by type of business, with retail clothing suffering a higher tax burden than other merchandise retail. The third most significant challenge for small firms in HCMC was poor infrastructure. The most vocal respondents on this issue owned shops in Le Van Sy Street where roadworks in front of their shops had been in progress for over two months. The roadworks had caused traffic jams, and discouraged customers. In addition, the roadworks had exacerbated poor drainage, and hence, caused flooding whenever there was heavy rain. 395 In order to address the issue of competition, 77 percent of the respondents focused on customer service; for example, salespersons often offered special prices for loyal customers, and contacted them when there were new arrivals. The remainder of the respondents (23 percent) reported that they competed on price alone. Many also sought suppliers who could provide them with attractive clothing styles. In addition to the most serious constraints on their businesses and the effects of the economic recession, the business owners were also asked about some of the management practices that they employed. The respondents generally reported that they perceived their primary function as managing day-to-day operations in a very hands-on manner. The implication of their view of management was that they felt it necessary to be present at their shop for as many of the opening hours as possible. For those opening hours when the owners could not be physically present, they tended to delegate to family members or relatives on whom they believed they could rely. On the issue of recruitment, respondents generally suggested that high school education was not a prerequisite for employment. The more important issues being neat appearance, and experience in sales. None of the small firms used any form of performance appraisal for their employees. Owners instead observed salespersons during work time, and provided comments immediately when someone did ―something wrong‖; that is, a reliance on negative reinforcement to condition behaviour (Skinner 1969). None of the respondents provided formal training for employees, but they did informally induct new employees on the basics of shop rules, prices, and origin of merchandise. On the issue of compensation practices, full-time salespersons earned on average US$60 per month (2 million Vietnamese Dong), and received an additional US$15 bonus on the Tet holiday (3-day lunar new year festival; January-February). Part-time salespersons earned on average US$35 per month, and received no bonus on the Tet holiday. The wages of full-time retail sales staff, while more than the average income of US$30 per month for urban dwellers in Vietnam (Vietnam Household Living Standards Survey: Income 2006), were considerably less than alternative employment choices, such as clothing factory workers who could earn US$100 per month (Vietnam garment makers face rising bankruptcies 2006). DISCUSSION AND CONCLUSIONS The study sought to explore the short-term impact of the 2008 global economic recession, as well as the longer-term business constraints that impact on the efficiency and potential for growth for small firms in Vietnam. To this end, the study focused on the retail clothing industry in Ho Chi Minh City (HCMC) as a basic barometer of the health of the Vietnamese economy. The results of the study highlight a number of common characteristics of Vietnamese small firms. These characteristics include family-ownership, distrust of outsiders, strong competition, and lack of managerial skills. There appears to be a vicious circle involving owners employing uneducated workers on low wages, and low productivity of both employees, and owners whose time is consumed with close supervision amidst a distrustful working environment. The results support the views of other authors that human resource management in small Vietnamese firms is ineffective, in terms of selection, motivation, performance appraisal, training, and compensation practices (see, for example, Hiemstra et al. 2006; King-Kauanui 396 et al. 2006; Mansurel and Smit 2000; Nguyen 2007; Nguyen et al. 2004). Limited access to finance was raised indirectly by the fact that all respondents had financed the start-up of their businesses with either personal funds, or funds from their ‗personal network‘ of relatives or contacts. Operating costs were problematic in the form of government taxes. Rental costs were not an issue because all respondents owned the commercial premises from which they operated their businesses. Indeed, the ownership of premises provided a great deal of resilience in the economic recession, saving them from the fate of bankruptcy that had befallen many other Vietnamese businesses in 2008 (Phuoc 2009). Moreover, small firms naturally have the advantage of flexibility in the control of inventory, as well as intimate contact with customers, each again providing some resilience in challenging economic times. The results of the study indicate that the infrastructure of HCMC is not particularly conducive to the business environment. Traffic jams, deteriorated roads, and frequent flooding are unfavourable experiences to the Vietnamese in general, and to family-based small firms in particular. The business constraints identified by the present study are, of course, not unique to Vietnam. 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New York: Oxford University Press 400 CHALLENGES FOR MEASUREMENT IN ACCOUNTING AFTER THE CRISIS Jiří Strouhal University of Economics Prague Dept of Financial Accounting and Auditing, W. Churchill Sq. 4, 130 67 Prague 3, Czech Republic Tel: +420 224 095 794 E-mail:
[email protected] Jiřina Bokšová University of Economics Prague Dept of Financial Accounting and Auditing, W. Churchill Sq. 4, 130 67 Prague 3, Czech Republic E-mail:
[email protected] Dana Dvořáková University of Economics Prague Dept of Financial Accounting and Auditing, W. Churchill Sq. 4, 130 67 Prague 3, Czech Republic E-mail:
[email protected] ABSTRACT During last 30 years financial reporting faced the shifting of the measurement bases from traditional concept of historical costs towards a fair value concept. Numerous critics stress their attention on the problem of fair value measurement as one of the major factors of the current crisis. Barlev & Haddad (2007) focused on the relationship between fair value accounting (FVA) and international accounting harmonisation, showing that FVA propels this harmonisation and this provides more relevant information that may foster the efficiency of global markets, which improves the quality of the FVA figures. This paper summarizes pros and cons or this reporting base. INTRODUCTION Measurement in financial reporting is one of factors which determines the quality and reliability of presented information. There may be seen a conflict between the requirements for relevance and timeliness of measurement on one side and the reliability and conclusive evidence on the other side. However, it should be stated that the important problem of measurement issues is the possibility of subjective manipulation with values, which is possible when using certain measurement bases. Applied principles of measurement and their regulations are interdependently correlated with the informational needs of external users (especially investors) and internal users (managers). Owners of the company may behave as external users (e.g. minority shareholders) or as internal users. Requirements on content of accounting information given by the accounting 401 used (and measurement) method are strongly connected not only with the group of users (internal versus external) but also with the economic environment. The actual economic environment strongly affects the requirements for measurement requested from users. In an economic boom there can be seen to be higher optimism of investors which leads towards requirements of measurement of all accounting items at fair value, which mainly represents current market prices of assets. Using this concept means turning from the prudence principle and the conservative historical costs concept in financial accounting. Moreover fair value concept in financial accounting leads to a higher tendency for revaluation of assets or liabilities affecting profit or loss of the company. Under economic crisis conditions users revaluate their views on accounting methods, especially the measurement bases. When we try to find out the reasons for an economic crisis, we can hear opinions that it was very optimistic information which was given by fair value accounting in the period of the economic boom. But historically the greatest moment was of course Black Friday at the New York Stock Exchange, after which the crisis smote almost allof the world in the 1930s. Also at that time it was often heard that accounting was unable to provide the information which might have helped users to predict this abrupt change. The reaction to this crisis was the evolution of US GAAP – national standards which would apply to face problems like this. Of course, it should be stated that after the period of crisis an economy tends to break down strict conservative rules and principles because of the pressure of investors‘ requirements; there can then be seen to be divergence from the prudence principle towards measurements-based on actual market prices (or so called fair values). This evolution was seen during the last few decades, not only at the international level (standards IFRS and US GAAP) but also at national levels (requirement to measure certain assets at fair value given by the Czech Accounting Act). A good example is the essential material of IASB (International Accounting Standards Board) prepared a by group of Canadian experts which dealt with the measurement of assets and liabilities upon initial recognition and favored the divergence from historical costs measurement towards the fair value concept. Quite important were also the discussion papers of IASB and FASB (Financial Accounting Standards Board) which dealt with unification of the fair value concept in IFRS and US GAAP. Of course all these materials were presented before the occurrence of the current economic crisis. We think that the tendency towards fair value measurement results from investor pressure: the main objective for investors is capital spillover and maximization of short-term profits. It is impossible to ignore the fact that all these requirements were strongly connected with economic boom conditions. The current economic crisis may evoke the renaissance of conservative approaches in measurement, especially the applicability of the prudence principle. Confidence in financial markets falls during such a crisis where there can be seen strong price swings. Swings in market prices of financial instruments or a breakdown of the real estate market may also evoke valid doubts whether the fair value concept (and market price is the most reliable evidence) is really the most objective and most reliable approach suitable for a wide spectrum of users of accounting information. Research in the area of valuation and measurement is necessary to handle not only from concrete economic situation and current market conditions, but it is essential also to discuss 402 the potential risks which are connected with such a restricted view. A too ―optimistic‖ approach applied in an economic boom is based on the fair value approach. The high value of assets which is given by an active market or based on the estimates in cases where an active market does not exist, leads towards rising equity as well as balance sheet amounts and in cases of revaluation through profit or loss also leads towards fictional profits which can be distributed to owners. It shall also be stated that the estimates of fair values for non-financial assets, but also for certain financial assets (e.g. shares) used to have low level of reliability because of the subjective estimates of a valuator or being based on mathematical models which are based on restrictive assumptions. On the other hand, the approach based on accounting conservatism and the prudence principle in recession periods may (jointly with inflation) lead towards erosion of a company‘s substance and deepen and prolong the recession. Financial reporting outputs are intended for presentation of the company to the external environment, i.e. to external users, who determine the requirements for reporting outputs (i.e. financial statements and annual report). These requirements are (at a certain level) mapped to a system of normative regulation of accounting within countries, or in the global (multinational) level. The influence of external users on the content of accounting information has been dominant during the last decades and the role of owners and managers conforms to investors‘ interests. In case those companies want to come across a market and receive necessary sources of capital for their businesses, they have to provide investors with the required information. In many countries, strict accounting rules apply which provide companies with only a very small manoeuvring space for presentation of information according to investors‘ requirements. The paper has been structured by framing the shifts in financial reporting paradigms for financial instruments within the trade literature, starting with previous research on international accounting harmonization and continuing with specific issues concerning financial instruments. The research methodology presents the particular approach of the analyzed area, namely identifying the particularities of reporting for financial instruments as foreseen by national GAAPs in correspondence to IFRS, through both theoretical description and empirical analysis, and continuously linking the findings to the actual knowledge stage and theories developed in the field. The final part of the paper relates the conclusions of the study to national regulatory bodies and also to the international background. LITERATURE REVIEW Capital market-based research in financial accounting goes back to the early 1970s and represents a widely approached topic with good reason. The most common studies investigate the association between accounting information and key capital market variables, such as the subject company‘s share price, or the rate of return on its shares over some time period, or their systematic risk (Brown and Howieson, 1998) and even concludes that multinational firms appear to employ internal capital markets opportunistically to overcome imperfections in external capital markets (Desai et al., 2004). 403 In the review made while examining the European evidence for the relationship between accounting information and capital markets, Dumontier and Raffournier (2002) classify the European literature into three groups: studies of the market reaction to newly released accounting information; studies of the long term association between stock returns and accounting numbers and studies devoted to the use of accounting data by investors and to the impact of market pressure on accounting choices. Strouhal et al. (2009) also analyze the Czech derivatives‘ market. The authors performed an empirical study of data obtained from 51 companies listed on the Prague Stock Exchange. They focused on a comparison of the reporting of financial derivatives using IFRS versus Czech accounting regulations. The findings revealed the existence of information asymmetry which may be advantageous to some parties involved in derivatives trading. The low level of information reported on derivatives operations may produce difficulties for accounting information. There must be mentioned that narrowing of the alleged gap between accounting research and accounting practice which was also previously approached within the trade literature (Schipper, 2005; Beresford and Johnson, 1995; Leisenring and Johnson, 1994). Research in the field of accounting harmonization has focused primarily on two basic aspects – the reliability and the correctness of the evaluation (e.g. Aisbitt, 2001; Emenyonu and Grey, 1996; Herman and Thomas, 1995). Beyond these aspects we should mention a set of conceptual approaches which emphasize a system of factors which are considered to be favourable or even determinant for the national accounting diversity. If we intend to identify the common elements of these approaches, it can be concluded that the most often met aspects, which on one hand influence or play an important role in matters concerning the development of national accounting standards, and on the other hand, determine the positioning of the accounting profession within the context of international accounting harmonization, can be considered to be reflected through: the degree of global economic integration, the financing resources, the legal and political system, the fiscal system, the accounting professions‘ status, the culture, the accounting language and other external influences. Before the IFRS standards were adopted in the EU, it was stock exchanges in particular which required that listed entities submit financial statements in compliance with the IFRS or US GAAP. Previous research dealing with the degree of disclosure (Cooke, 1992; Meek et al., 1995), or the probability of using multinational standards (El-Gazzar et al., 1999; Murphy, 1999; Leuz, 2003) indicate a positive correlation between the listing of accounting units on foreign markets and the degree of disclosure and use of multinational standards as the basis for financial reporting. Trade literature which approaches the topic of interaction between regulations issued by FASB and IASB (Chawla, 2003; Zeff, 2007) sustains the idea that those standards, which are issued by the international standard setting body (IASB), have a strong practical (material) character when considering matters of presenting financial accounting information. Strouhal et al. (2008) analyzed accounting harmonization with reference to the standards which are most widely discussed in terms of their practical implementation, namely: IAS 32 404 Financial Instruments: Presentation, IFRS 7 Financial Instruments: Disclosures, and IAS 39 Financial Instruments: Recognition and Measurement. It is Veron (2008) who defends the international reference considering the current crisis‘ circumstances, by underlying the importance of also analyzing the way IFRSs are applied, key issue often underestimated in Europe. He also recalls what the Banking Supervision Committee of the Euro system had stressed before the crisis began (ESCB Banking Supervision Committee, 2006), namely that the quality and international consistency of IFRS implementation and enforcement is vital to financial stability. RESEARCH DESIGN AND METHODOLOGY The paper develops a diagnosis of the national accounting system of the Czech Republic in the particular area of reporting for financial instruments. This is done through a descriptive analysis of the considered variables. The quintessence of the research methodology is based on the mutual relationship between information provided through financial reporting and the capital market. On one hand there are accounting regulations strongly influencing the outcome of financial reporting, and then, it is this outcome that determines the reaction of players on the capital markets. The reactions of players on the capital market often leads to financial engineering that must activate the reaction of standard setting bodies which will respond through the tool of accounting regulations and the circle is therefore reengaged. The reactions of players on the capital market and their financial engineering determine the investors‘ behaviour, while the reaction of standard setting bodies and accounting regulations are part of the accounting regulatory process. The outcome of financial reporting is also influenced by the accounting profession and accounting practices. The investors‘ behaviour, the accounting regulatory process, the accounting profession and accounting practices are all influenced by one country‘s history, culture, and the political and economic environment. An empirical analysis is performed on accounting regulations in the field of financial instruments. This involves closely analyzing the foresights of the national accounting regulations and of the IFRSs. The similarities and dissimilarities between the accounting regulations are therefore determined. The most frequently used methods in trade literature when an analysis at the level of national accounting regulations is aimed are Jaccards‘ association coefficients. The Jaccard coefficient (Jaccard, 1901) is defined as the size of the intersection divided by the size of the union of the sample sets: (1) The Jaccard distance is complementary to the Jaccard coefficient and measures the dissimilarities. It is obtained by dividing the difference of the sizes of the union and the intersection of two sets by the size of the union: (2) In order to achieve a quantification of the similarity degree between the considered accounting reference there was developed an empirical analysis of comparison. Based on the 405 methodology of previous studies dealing with formal harmonization (Fontes et al., 2005; Strouhal et al., 2008) there was identified a series of elements regarding financial instruments which we then organized within five big topics as follows: 1. Financial assets, 2. Financial liabilities, 3. Equity instruments, 4. Derivatives and 5. Hedge accounting. For each one of the 20 elements which were identified we proceeded to achieve a comparison between the accounting treatment as it appears within the four accounting references considered for analysis. Thus, for each possible and/or existent accounting treatment within at least one of the considered accounting references we have allocated a 1 or 0 value, where the 1 value shows that the considered accounting treatment exists within the considered accounting reference, and the 0 value is given for the situation when the considered accounting treatment is not found within the considered accounting reference. The two considered coefficients offer the possibility of quantifying both the association degree and the dissimilarity degree between different sets of accounting standards taken into consideration for analysis. So as to dimension the association or compatibility level between two or more accounting systems, the calculation formula for the Jaccards‘ coefficients shows as follows: (3) or (4) where: S ij represents the similarity degree between the two sets of analyzed accounting regulations; D ij represents the degree of dissimilitude or diversity between the two sets of analyzed accounting regulations; a – the number of elements which take the 1 value for both sets of regulations; b – the number of elements which take the 1 value within the j-set of regulations and the 0 value for the i-set of regulations; c – the number of elements which take the 1 value within the i-set of regulations and the 0 value for the j-set of regulations. FINDINGS FINANCIAL REPORTING SYSTEM IN CZECH REPUBLIC The case of the Czech Republic is interesting through the choice made in 1991 referring to building the national accounting system based on the French model, even though the cultural semblance and linguistic closeness criteria were not characteristic, during that period, the relationship between France and the Czech Republic. The arguments for this choice can be seen in the intention of creating a certain frontier for the German great economic interest in the Czech economy; even though the German model caught the Czechs‘ attention. In fact the English model was the ―gaining field‖ in the accounting development area, training courses being mostly financed from the European PHARE program; the English model did not have enough credibility because of its dispersion and because of some scandals which were publicly presented. Moreover the American model seemed to be complicated and difficult to implement. The vote for the French model was also given by the aim of the Czech Republic to be integrated within the EU. 406 For the area of financial securities, there may be used several revaluation models: - historical costs approach - equity method through OCI (other comprehensive income) - fair value through OCI - fair value through profit or loss TESTING OF SIMILARITIES WITH MULTINATIONAL REFERENTIAL Based on the description of the empirical analysis which was done within the research methodology, there has been empirically tested the comparability degree between the selected accounting referential from two major points of view: 1. the one referring to the similarities between them, and 2. the one of the dissimilarities between the three accounting systems. In order to achieve the proposed comparison, we have considered that the best analysis, for this type of approach, is represented by the nonparametric correlation and the association degree between two or more than two considered variables. The major differences are given especially by the level of disclosures required for financial instruments. The comparative illustration of the obtained results is shown within the following tables. TABLE 1. ANALYSIS OF SIMILARITIES CZE IFRS EU CZE 1.000 0.651 0.561 IFRS 0.651 1.000 0.811 EU Directives 0.561 0.811 1.000 source: authors‘ analysis TABLE 2. ANALYSIS OF DISSIMILARITIES CZE IFRS EU CZE 0.000 0.349 0.439 IFRS 0.349 0.000 0.189 EU Directives 0.439 0.189 0.000 source: authors‘ analysis Both the dissimilarities and the similarity coefficients are calculated through the study and presented within these tables and show a great degree of similarity between all three considered sets of accounting regulations where issues of reporting for financial instruments are concerned. The Czech accounting regulations are similar with the European Directives, but not as much as with the international referential (0.439 Jaccard‘s dissimilarity coefficient and 0.561 Jaccard‘s similarity coefficient). The performed analysis also reveals an extremely high level of similarities between the foresights of the international referential (IFRS) and the European Directives on issues connected to financial instruments (0.189 Jaccard‘s dissimilarity coefficient and 0.811 Jaccard‘s similarity coefficient). These results are further investigated within the conclusions of the paper. 407 The major differences in the field of reporting of financial instruments under national regulation of the Czech Republic are seen in the lower level of disclosed information which is required by Czech accounting law. REVALUATION APPROACHES AND THEIR IMPACT ON CERTAIN FINANCIAL MEASURES In the Czech Republic there may be used several revaluation models for measurement of financial securities. The accounting regulations prefer to use the equity method for measurement of shares with higher than substantial influence, while for other long-term shares it prefers to use fair value through the OCI model. Measurement via P/L is used for short-term shares held for trading. However these models have different effect on certain financial measures such as Return on Assets (ROA), Return on Equity (ROE) or EPS (Earnings per Share). Therefore sensitivity analysis of these measures on various revaluation models was provided for the revaluation of shares in the rank of -10 % ; + 10 % from the initial historical costs (see figures 1 – 3). FIGURE 1. SENSITIVITY ANALYSIS OF ROA, ROE AND EPS ON HISTORICAL COSTS MODEL -12,0000% -10,0000% -8,0000% -6,0000% -4,0000% -2,0000% 0,0000% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% ROA ROE EPS The most sensitive ratio on the Historical Costs Model is Earnings per Share (the effect is proportional). The historical cost model does not allow the revaluation on higher values, therefore it is clearly seen, that there is no effect on revaluation higher than 0 % from the initial historical costs. 408 FIGURE 2. SENSITIVITY ANALYSIS OF ROA, ROE AND EPS ON OCI MODELS (EQUITY MODEL, FAIR VALUE THROUGH OCI) -2,5000% -2,0000% -1,5000% -1,0000% -0,5000% 0,0000% 0,5000% 1,0000% 1,5000% 2,0000% 2,5000% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% ROA ROE EPS The most sensitive ratio on Equity Method or Fair Value through OCI is Return on Equity (higher values than initial historical costs have a negative under-proportional effect on profitability ratios given by the higher value of the revaluation fund in equity). These revaluation methods do not have any effect on Earnings per Share. FIGURE 3. SENSITIVITY ANALYSIS OF ROA, ROE AND EPS ON FAIR VALUE MODEL THROUGH P/L -10,0000% -8,0000% -6,0000% -4,0000% -2,0000% 0,0000% 2,0000% 4,0000% 6,0000% 8,0000% 10,0000% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% ROA ROE EPS The most sensitive ratio on Fair Value through Profit/Loss is Earnings per Share, however this sensitivity is under-proportional. 409 CONCLUSIONS The performed empirical analysis on aspects concerning reporting for financial instruments documented the existence of a high similarity degree among all considered accounting referential (IFRS, European Directives and Czech accounting regulations). This study continues previous research by considering the foresights of the European Directives with a particular reason. Nowadays, lots of fingers seem to be pointing to the international referential to be a major factor in the current crisis. However, this is a much too simple approach in determining the roots of the real problems. Doubtful eyes are already laying on IFRSs and asking how they could have allowed this to happen. We should not forget though that the role of each national accounting system in generating information uses on capital markets. A principle based accounting regulation has as a centre- piece professionals capable of ethically making decisions that are in their hands, based on sound economic judgements. The real state of facts is that nowadays that the European Directives actually incorporate a great deal of the foresight of the IFRS which should not therefore be blamed for all the wrongs in the international financial arena. It is also true that the prudence, so highly valued by continentals, seems to have saved some of the damages of the financial crisis in some cases, but prudence itself can be thought of as professional judgement arising from sound accounting principles. It is clear that countries like the Czech Republic are far from making themselves heard at an international level just by considering the degree of development of their national capital market. Still we have a European organism representing them and trying to abreast of international developments. We must not forget that beyond the standards themselves, how they are applied is a key issue (Veron, 2008) whose analysis would have a say in discovering the roots of the current crisis which cannot be blamed on the IFRSs. This not only represents reasoning for not blaming certain accounting regulations as responsible of generating by them informational outcomes that unleashed the financial crisis. It also underlines starting points for feature research on developments that would bring light to the current situation. A rational approach on the financial crisis is essential for decision making and avoiding further mistakes such as unfitted radical measures similar to ―noise‖ traders‘ actions on the capital market. It should be also be mentioned of a technical drawback of this empirical analysis. This refers to the analysis determining the dissimilarity degree between the considered accounting regulations on a relative basis, but what Jaccard‘s coefficients cannot do is to quantify the importance and further impacts of those differences. Among new research opportunities shall be therefore, stated weighting the importance of selected topics for the outcome of financial reporting. It is clear that accounting for financial instruments is likely to remain an extremely difficult area, both in the short term and for a number of years. Still there seems to be a general consensus among the major standard setters and their representatives that fair valuing of all financial instruments can be the only ultimate solution. IASB (International Accounting Standards Board – IFRS Standards Setter) and FASB (Financial Accounting Standards Board 410 – US GAAP Setter) have also reiterated their long term objective of requiring all financial instruments to be measured at fair value with realised and unrealised gains and losses recognised in the period in which they occur. This controversial view has to deal with considerable resistance even though the standards setters are trying to move ahead of current practices in offering suitable solutions. Reality shows us that there are no readymade solutions and that each country should carefully consider its approach to standard setting before choosing an option. The success of accounting reform depends on the development of an appropriate institutional framework for the setting of accounting standards and the corresponding accounting profession‘s development. Institutional mechanisms should be developed to ensure that standard setting procedures are fair and transparent, allowing all interested parties to express their views. This would still not mean that the accounting regulation process is completed, flexibility being further needed to offer the capacity of accommodating future developments. Confidence in accounting systems necessarily means confidence in the accounting profession, a competent and independent profession having its role in the development and enforcement of accounting standards. ACKNOWLEDGEMENT This paper is one of the research outputs of the project GA402/08/P024 registered at Czech Science Foundation (GAČR) and project MSM 6138439903 registered at Ministry of Education CR. 411 REFERENCES Aisbitt, S. 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(2007). ―Some Obstacles to Global Financial Reporting Comparability and Convergence at a High Level of Quality‖, British Accounting Review, 39 (1), 290-302. 413 TOURISM: GLOBAL STATUS AND TRENDS Prasanna.T Department of Studies in Economics Government First Grade College Koppa – 577 126 Chickmagalur District, Karnataka State, India Tel: +08265 - 221005 Fax: +08265 – 221005 Mobile: +91-94819 89498 Email:
[email protected] ABSTRACT Directing tourism growth toward local needs, interest, and limits can greatly enhance tourism’s value to the community and help create a sustainable industry. Many small communities have the skills and resources for successful tourism development. Creating a local tourism industry is not a daunting task, but making tourism really ―fit‖ the community requires work. Creating a successful and sustainable tourism industry is like creating any successful and sustainable economic activity. Such a task takes into consider vision planning and work. INTRODUCTION During the post globalization period, India witnesses the tremendous influence of its service sector as a key for economic development. Tourism is one of the powerful means to attain development, foreign exchange and national integration. The travel and tourism sector creates more jobs per million rupees of investment than any other sector of the economy and it is capable of providing employment to a wide spectrum of job seekers from the unskilled to the specialized even in the remote parts. The promotion of national integration, international understanding and foreign exchange earnings, the Tenth Five Year Plan recognized the vast employment generating potential of tourism and its role in fulfilling the socio-economic objectives of the plan. The new tourism policy 2002 aims at generating awareness about the benefits of tourism for the host population with a stress for decentralization, the state government to use tourism as a means for achieving their socio economic goals. THE IMPACTS OF TOURISM 414 The long-term sustainability of tourism rests on the ability of community leaders and tourism professionals to maximize its benefits and minimize its costs. This fact sheet tabulates 87 tourism impacts within seven categories and divides the sources of tourism impacts into touri causes and destination-based causes (Allen, Long, Perdue and Dieselbach. 1988). This information was distilled from recent tourism impacts into touri causes and destination-based causes. This information, was distilled from recent tourism research, provides framework for discussions, directions, and development regarding tourism Formally addressing the impacts of tourism facilitates planning that helps a community create a sustainable tourism industry. The Global Status of Travel and Tourism Industry during the Post Globalization Period can be analyzed by highlighting the impacts of tourism industry. The impact of tourism will be analyzed under the following heads.viz. 1) Economic, 2) Environmental, 3) Social and Cultural, 4) Crowding and Congestion, 5) Services, 6) Taxes and 7) Community Attitude. Each category includes positive and negative impacts. Not all impacts are application to every community due to conditions or resources differ. Community and tourism leaders must balance an array of impact that may either improve or negatively affect communities and their residents. Leaders must be sensitive and visionary and must avoid the temptation of glossing over certain difficulties tourism development creates. Tourism leaders must also balance the opportunities and concerns of all community sectors by working against conditions where positive impacts benefit one part of the community (geographic or social) and negative impacts hurt another. Conversely, community sensitivity to tourism means avoiding undue burdens on the industry that could threat its success. Local leaders should not expect tourism to solve all community problems. Tourism is just one element of a community. While creative strategic development of tourism amenities and services can enhance the community or correct local deficiencies. The tourism, is all about business development, must assure that its products (attractions and services) attract customers. Overbearing rules and restrictions as well as over burdening taxes can make tourism businesses less attractive or competitive (Augustyn, 1998). ELABORATION OF TOURISM IMPACTS A goal of developing the tourism industry in a community is maximizing selected positive impacts while minimizing potential negative impacts (Hawkins,1982). First, it is essential to identify the possible impacts. Tourism researchers have identified a large number of impacts. Grouping the impacts into categories shows the types of impacts that could result from developing tourism in a community. The following tables list a range of important tourism impacts in a concise format. Readers needing additional information about specific impacts should contact appropriate professionals or consult tourism texts and research papers. A community will not experience every impact. Some are dependent on particular natural resource features (mountains, coral reefs) or development and spatial patterns (special ―tourist zones‖). Other relate to the social condition of the community and the ability to culturally or socially connect with tourists (Dowling, 1999). . Still others relate to types of 415 intensity of tourism developments i.e., approval or hostility toward tourist activities. The following tables are extensive but not all-inclusive. ECONOMIC IMPACTS Tourism increases employment opportunities. Additional jobs, ranging from low-wage entry- level to high-paying professional positions in management and technical fields, generate income and raise standards of living. In rural areas, the diversification created by tourism helps communities, which are possibly dependent on one industry. As tourism grows, additional opportunities are created for investment, development and infrastructure spending. Tourism often includes improvements in public utilities such as water, sewer, sidewalks; lighting, parking, public restrooms, litter control, and landscaping. Such improvements benefit tourists and residents alike. Such tourism encourages improvements in transport infrastructure resulting in upgraded roads, airports, public transportation, and non-traditional transportation (e.g. trails). Tourism encourages new elements to join the retail mix, increasing opportunities for shopping and adding healthy competitiveness (Smith, and Krannich. 1998). It often increases a community‘s tax revenues. Lodging sales taxes most notably increase but additional tax revenue includes air travel and other transportation taxes, business taxes, and fuel taxes. New jobs generate more income tax revenues. When considering the economic impacts of tourism, it is essential to understand the tourism businesses often include a significant number of low-paying jobs, often at minimum wage or less. These jobs are often seasonal, causing under-employment or unemployment during off- seasons. Labor may be imported, rather than hired locally, especially if particular skills or expertise is required or if local labor is unavailable. Some tourism-related businesses are volatile and high-risk ventures that are unsustainable. Greater demand for goods, services, land and housing may increase prices that in turn will increase the cost of living. Tourism businesses may claim land that could have higher-value or other uses. In addition, non-local owners and corporations may export profits out of the community. The community may have to generate funds (possibly through increased taxes) to maintain roads and transportation systems that have become more heavily used. Similarly, if additional infrastructure (water, sewer, power, fuel, medical, etc.) is required, additional taxes may also be needed to pay for them. Positive and Negative Impacts The positive impacts comprises, contributes to income and standard of living, improves local economy, increases employment opportunities, Improves investment, development, and increases tax revenues, improves public utilities infrastructure, improves transport infrastructure, Improves transport infrastructure, Increases opportunities for shopping, Economic impact (direct, indirect, induced spending) is widespread in the community, creates new business opportunities. Similarly, the negative impacts includes, increases price of goods and services, increases price of land and housing, increases cost of living, increases potential for imported labor, cost for additional infrastructure (water, sewer, power, fuel, medical, etc), increases road maintenance and transportation systems costs, seasonal tourism creates high-risk, under or 416 unemployment issues, competition for land with other (higher-value) economic uses, Profits may be exported by non-local owners, Jobs may pay low wages. ENVIRONMENTAL IMPACTS Areas with high-value natural resource, like oceans, lakes, waterfalls, mountains, unique flora and fauna, and great scenic beauty attract tourists and new residents (in-migrants) who seek emotional and spiritual connections with nature. Because these people value nature, selected natural environments are preserved, protected, and kept from further ecological decline. Lands that could be developed can generate income by accommodating the recreational activities of visitors. Tourist income often makes it possible to preserve and restore historic buildings and monuments. Improvements in the area‘s appearance through cleanup or repairs and the addition of public art such as murals, water fountains, and monuments (part of making a community ready for tourism) benefit visitors and residents alike. Tourism is generally considered a ―clean‖ industry, one that is based on hotels, restaurants, shops and attractions, instead of factories. Tourism can also degrade an environment. Visitors generate waste and pollution (air, water, solid waste, noise and visual) Natural resource attractions can be jeopardized through improper uses or overuse. Providing tourist services can alter the landscape‘s appearance. Fro instance, visual pollution may occur from billboard proliferation. As tourism develops, demand for land increases, especially for prime locations like beachfronts, special views, and mountains. Without forethought, natural landscape and open space can be lost. The destruction or loss of flora and fauna can happen when desirable plants and open space can be lost. The destruction or loss of flora and fauna can happen when desirable plants and animals are collected for sale or the land is trampled. Tourists or the businesses that cater to them often remove plants, animals, rocks, fossils, coral, and cultural or historical artifacts from an area. Uncontrolled visitation or overuse by visitors can degrade landscapes, historic sites, and monuments. Where water is scarce, tourists can increases in the trade of animals and plants. A constant stream of visitors and domestic pets may disrupt wildlife by disturbing their breeding cycles and altering natural behaviors. Positive and Negative Impacts Protection of selected natural environments or prevention of further ecological decline, Preservation of historic buildings and monuments, Improvement of the area‘s appearance (visual and aesthetic), a ‗clean‘ industry are the positive impacts of environmental issues. On the other hand, negative impacts can be identified such as, pollution (air, water solid waste, and visual, loss of natural landscape, destruction of flora and fauna (including collection of plants, animals, rocks, coral, or artifacts by or for tourists), degradation of landscape, historic sites, and monuments, introduction of exotic species, disruption of wildlife breeding cycles and behaviors. SOCIAL AND CULTURAL IMPACTS 417 The social and cultural ramifications of tourism warrant careful consideration, as impacts can either become assets or detriments to communities. Influxes of tourists bring diverse values to the community and influence behaviors and family life. Individuals and the collective community might try to please tourists or adopt tourist behaviors. Interactions between residents and tourists can impact creative expression by providing new opportunities (positive) or by stifling individuality with new restrictions (negative). Increased tourism can push a community to adopt a different moral conduct such as improved understanding between sexes (positive) or increased illicit drug use (negative). Safety and health facilities and staffing tend to increase at the same time safety problems such as crime and accidents increase (Hawkins, 1982). Traditional ceremonies may be renewed and revived by tourist interest or lost in alternative activities. Community organizations can be invigorated by facing the opportunities of tourism or overwhelmed by its associated problems. Calamities such as natural disasters, energy shortages, terrorism, political upheaval, disease outbreak, a chemical spill, or even widespread negative publicity could shut down tourism abruptly but sometimes can attract curious visitors. Tourism can improve the quality of life in an area by increasing the number of attractions, recreational opportunities, and services. Tourism offers residents opportunities to meet interesting people, make friendships, learn about the world, and expose themselves to new perspectives. Experiencing different cultural practices enriches experiences, broadens horizons, and increases insight and appreciation for different approaches to living. Often, dwindling interest in host cultures in revived by reawakening cultural heritage as part of tourism development, which increases demand for historical and cultural exhibits. This interest by tourists in local culture and history provides opportunities to support preservation of historical artifacts and architecture. By learning more about others, their differences become less threatening and more interesting. At the same time, tourism often promotes higher levels of psychological satisfaction from opportunities created by tourism development and through interactions with travelers. Tourism can come to a community with a dark social and cultural side, too. IIIegal activates tend to increase in the relaxed atmosphere of tourist areas. Increased underage drinking can become a problem especially in beach communities, areas with festivals involving alcohol, and ski villages. It is easier to be anonymous where strangers are taken for granted; bustling tourist traffic can increase the presence of smugglers and buyers of smuggled products. Lifestyle changes such alterations in local travel patterns to avoid tourist congestion and the avoidance of downtown shopping can damage a community socially and culturally. Hotels, restaurants, and shops can push tourism development into residential areas, forcing changes in the physical structure of a community. Development of tourist facilities in prime locations may cause locals to be or feel excluded from those resources. As local ethnic culture alters to fit the needs of tourism, language and cultural practices may change. In places where longer- term visitors tend to congregate, social cliques, such as condo tourists, may be at odds with local interests and work to influence local issues. The ―demonstration effect‖ of tourists (residents adopting tourist behaviors) and the addition of tourist facilities may alter customs, such as dating habits, especially those of a more structured or traditional culture. The potential of meeting and marrying non-local mates may create family stress. Positive and Negative Impacts 418 Improves quality of life, facilities meeting visitors (educational experience), positive changes in values and customs, promotes cultural exchange, improves understanding of different communities, preserves cultural identity of host population, increases demand for historical and cultural exhibits, greater tolerance of social differences, satisfaction of psychological needs are covers under positive impacts. Excessive drinking, alcoholism, gambling, increased underage drinking ,crime, drugs, prostitution, Increased smuggling, language the cultural effects, unwanted lifestyle changes, displacement of residents for tourism development, negative changes in values and customs, Family disruption, exclusion of locals from natural resources, new cliques modify social structure, natural, political, and public relations calamities are comes under negative impacts. CROWDING AND CONGESTION IMPACTS People congregate in attractive places. Tourism often develops around specific locations and concentrates there, providing growth yet avoiding sprawl. Historic buildings and grounds, which might otherwise slowly deteriorate, have great appeal for tourism development and can often, are renovated to suit the industry. As people congregate, congestion and crowding produces stress, annoyance, anger, and other negative attitudes. Hordes of visitors may impede local businesses, prevent residents from accomplishing normal activities, and compete for space. Tourism construction, especially hotels, may be inappropriate in scale and style with respect to other structures and the landscape. In some areas, recreational second homes and condominium developments create major crowding and congestion problems. Positive and Negative Impacts The positive impacts of crowding and congestion are minimizes sprawl, concentrates tourist facilities, old buildings reused for tourism. Congestion including interference with other businesses, overcrowding-exceeding area capacity, conflict, overpowering building size and style are covered under negative impacts. SERVICES IMPACTS Tourism creates opportunities to develop new amenities and recreation facilities that would not otherwise be viable in a community. Tourist expectations can upgrade service by local shops, restaurants, and other commerce operators. Tourist traffic in a community creates an opportunity for upgraded fire, police, and medical protection that also benefits residents. Traditional services may be forced out or relocated due to competition wit tourist interests. Supply shortages may occur, temporarily, seasonally, or chronically. Water power, fuel, and other shortages may be experienced with increased on the infrastructure. Positive and Negative Impacts 419 The service impacts had its own positive impacts like, increases availability of recreation facilities and opportunities, better standard of services by shops, restaurants, and other commerce, Improves quality of fire protection, Improves quality of police protection. Even it has some negative impacts namely, neglect of non-tourist recreation facilities, effects of competition, shortage of goods and services, increases pressure on infrastructure. TAX IMPACTS Increased retail activity from restaurants and tourist shopping will add state and local sales tax revenue. Lodging tax revenue to the city (or state) should increase since travelers account for virtually all lodging tax receipts. Increased tax burdens to expand infrastructure and public service will be passed on to property owners through increased property taxes. Positive and Negative Impacts The taxes impacts also had its own positive impacts such as, additional state and local sales tax revenue, lodging tax revenue to city or state. Conversely, it impacts negatively in the case increases property taxes. COMMUNITY ATTITUDE IMPACTS Visitor interest and satisfaction in the community is a source of local pride. Seeing visitor interest makes local residents more appreciative of local resources that are often taken for granted. As tourism develops, local residents more appreciative of local resources that are often taken for granted. As tourism develops, local residents will enjoy more facilities and a greater range of choices. Tourism activities and events end to make living in a place more interesting and exciting. However, heightened tension and community divisiveness can occur over tourism development, pitting tourism supporters against non-supporters. Also, tension between residents and tourists can occur. People will often feel stressed over the new, increasingly hectic community and personal pace of life. They may claim the result is no better than before or perhaps even worse. Where culture is part of the tourist attractions, over- amplification of cultural traits and creation of ―new‖ cultural traits to satisfy tourist tastes may create a phony culture. Residents may experience a sense of exclusion and alienation over planning and development concerns. They may feel a loss of control over the community‘s future as ―outsiders‖ take over establishments and new development. Over- dependence on non-local developers and an influx of outside businesses creates a sense that the community is being manipulated and exploited by outsiders for the sole benefit of those developers or business people. Hotels built in monolithic cubes or restaurants with standardized franchise designs might clash which local standards and disrupt the aesthetic appearance of the community, damage unique community character, and spread ―sameness‖. Positive and Negative Impacts 420 The community attitude impacts had its own positive impacts i.e., heightens pride in community, greater appreciation of local resources, more facilities and range of choices available, more interesting and exciting place to live. Heightens community divisiveness, Increasingly hectic community and personal life, Creates a phony folk culture, Residents experience sense of exclusion and alienation over planning and development concerns, Feeling of loss of control over community future (caused by outsider development), New building styles fail to ‗fit‘ community are the negative impacts of community attitude. CONCLUSION Directing tourism growth toward local needs, interest, and limits can greatly enhance tourism‘s value to the community and help create a sustainable industry. Many small communities have the skills and resources for successful tourism development. Creating a local tourism industry is not a daunting task, but making tourism really ―fit‖ the community requires work. Creating a successful and sustainable tourism industry is like creating any successful and sustainable economic activity. Such a task takes into consider vision planning and work. RECENT TRENDS IN TOURISM INDUSTRY The remarkable progress found in the tourism industry over the years during the post globalization period is represented with the help of the following tables mainly throwing light on the status of this activity the foreign exchange earnings and contribution from international tourist for the development of domestic tourism in India. TABLE 1: IMPORTANT FACTS ABOUT TOURISM - 2007 I) India No. of. Foreign Tourist Arrivals in India Annual Growth Rate No. of. Indian Nationals Going Abroad Annual Growth Rate No. of. Domestic Tourist Visits to all States/ UTs Annual Growth Rate Foreign Exchange Earnings from Tourism In INR terms Annual Growth Rate In US$ Terms Annual Growth Rate Million 14.3% 9.78 Million 17.3% 526.57 Million 14.0% Rs.44360 Crore 13.7% US$ 10.73 Billion 24.3% II) World No. of. International Tourist Arrivals Annual Growth Rate International Tourism Receipts Annual Growth Rate 903 Million 6.6% US$856 Billion 15.4% III) Asia and the Pacific Region 421 No. of. International Tourist Arrivals Annual Growth Rate International Tourism Receipts Annual Growth Rate 183.4 Million 104% US$ 188.9 Billion 20.7% IV) India‘s Position in World Share of India in International Tourist Arrivals India‘s rank in World Tourist Arrivals Share of India in International Tourism Receipts India‘s rank in World Tourism Receipts 0.56% 42 1.25% 20 V) India‘s Position in Asia and the Pacific Region Share of India in Tourist Arrivals India‘s rank in Tourist Arrivals Share of India in Tourism Receipts India‘s rank in Tourism Receipts 2.76% 11 5.68% 6 Source: Various Publications of the Reserve Bank of India, for 1996 to 2007 TABLE 2 : FOREIGN TOURIST ARRIVALS (FTAS) IN INDIA, 1996-2008 Year FTAs (in Million) Percentage (%) change over the previous year 1996 2.29 7.7 1997 2.37 3.8 1998 2.36 -0.7 1999 2.48 5.2 2000 2.65 6.7 2001 2.54 -4.2 2002 2.38 -6.0 2003 2.73 14.3 2004 3.46 26.8 2005 3.92 13.3 2006 4.45 13.5 2007 5.08 14.3 2008 2.72 11.1@ P: Provisional, @ Growth rate over Jan-June, 2007 Source: i) Bureau of Immigration, Govt. of India, for 1996-2007 Ministry of Tourism, Govt.of India, for 2008 TABLE 3 : FOREIGN EXCHANGE EARNINGS (FEE) (IN RS.CRORE) FROM TOURISM IN INDIA 1996-2008 Year FEE from Tourism in Percentage (%) change 422 India (in Rs.Crore) over the previous year 1996 10046 19.2 1997 10511 4.6 1998 12150 15.6 1999 12951 6.6 2000 15626 20.7 2001 15083 -3.5 2002 15064 -0.1 2003 20729 37.6 2004 27944 34.8 2005 33123 18.5 2006* 39025 17.8 2007* 44360 13.7 2008# (Jan-June) 25825 18.2@ *Revised Estimates, # Advance Estimates, @ Growth rate over Jan –June, 2007 Source: i) Reserve Bank of India, for 1996 to 2007 ii) Ministry of Tourism, Govt. of India, for 2008 TABLE 4 :TOP 10 SOURCE COUNTRIES FOR FOREIGN TOURIST ARRIVAL (FTAS) IN INDIA - 2007 Source: Bureau of Immigration, Govt.of India TABLE 5 : NUMBER OF DOMESTIC TOURIST VISITS OF ALL STATES / UTS IN INDIA, 1996-2007 Year No. of Domestic Tourist Visits (in Million) Percentage (%) change over the Previous year 1996 140.12 2.5 1997 159.88 14.1 Sl.No. Source Country FTAs (in Million) Percentage (%) Share 1 USA 0.799 15.73 2 UK 0.796 15.67 3 Bangladesh 0.480 9.45 4 Canada 0.208 4.10 5 France 0.205 4.03 6 Sri Lanka 0.204 4.02 7 Germany 0.184 3.62 8 Japan 0.146 2.86 9 Australia 0.136 2.67 10 Malaysia 0.113 2.22 Total of top 10 countries Others All countries 3.271 1.810 5.081 64.37 35.63 100.00 423 1998 168.20 5.2 1999 190.67 13.4 2000 220.11 15.4 2001 236.47 7.4 2002 269.60 14.0 2003 309.04 14.6 2004 366.27 18.5 2005 391.95 7.0 2006 461.76 17.8 2007* 526.57 14.0 *Provisional Note: Figures for Maharashtra and Chhattisgarh have been estimated Source: State/UT Tourism Departments TABLE 6 :NUMBER OF FOREIGN TOURIST VISITS TO ALL STATES/ UTS IN INDIA, 1996 - 2007 Year No. of Foreign Tourist Visits (in Million) Percentage (%) change over the Previous year 1996 5.03 8.4 1997 5.50 9.3 1998 5.54 0.7 1999 5.83 5.3 2000 5.89 1.1 2001 5.44 -7.8 2002 5.16 -5.1 2003 6.71 30.1 2004 8.36 24.6 2005 9.95 19.0 2006 11.75 18.1 2007* 13.17 12.1 *Provisional, Note: Figures for Maharashtra and Chhattisgarh have been estimated. Source: State/UT Tourism Departments TABLE 7 : SHARE OF INDIA IN INTERNATIONAL TOURIST ARRIVALS IN WORLD, AND ASIA AND THE PACIFIC REGION, 1996-2007 Year International Tourist Arrivals (in million) FTAs in India (in Million) Percentage (%) Share of FTAs in India in World Asia and the Pacific World Asia and the Pacific 1996 572.4 90.4 2.29 0.40 2.53 1997 596.0 89.7 2.37 0.40 2.65 1998 614.3 89.4 2.36 0.38 2.64 1999 637.4 98.8 2.48 0.39 2.51 424 2000 684.7 110.6 2.65 0.39 2.40 2001 684.4 115.8 2.54 0.37 2.19 2002 704.7 124.9 2.38 0.34 1.91 2003 692.7 113.2 2.73 0.39 2.41 2004 761.4 144.1 3.46 0.45 2.40 2005 803.0 155.3 3.92 0.49 2.52 2006 847.0 167.0 4.45 0.53 2.66 2007* 903.0 184.3 5.08 0.56 2.76 *Provisional Source: i) UNWTO Tourism Market Trends 2006 Edition, for the years up to 2004. ii) UNWTO Barometer October 2007 and June 2008 for 2005, 2006 and 2007. 425 REFERENCES Allen, L.R., P.T. Long, R.R. Perdue, and S Dieselbach. (1988). The Impact of Tourism Development on Resident‘s Perception of Community Life. Journal of Travel Research 27 (1): 16-21. Augustyn, M. (1998). National Strategies for Rural Tourism Development and Sustainability: The Polish Experience. Journal of Sustainable Tourism 6(3): 191- 209. Buhalis, D. (1999). Limits of Tourism Development in Peripheral Destinations: Problems and Challenges. Tourism Management 20(2): 183-185. Dowling, R.K.(1999). Tourism and Sustainability: Principles to Practice. Tourism Management 20(3): 379-381. Hawkins, D.E. (Ed.). (1982). Social and Economic Impact of Tourism on Asian Pacific Region. Tokyo: Asian Productivity Organization, p.iii. Kozak, N. (1993). Gokova Records: A ‗Monument of Obstinacy‘ in Gokova (Including the Contributions of Experts). Anatolia IV/1:8-18. Perdue, R.R., P.T. Long, and Y.S. Kang. (1999). Boomtown Tourism and Resident Quality of Life: The Marketing of Gaming to Host Community Residents. Journal of Business Research 44(3): 165-177. Ryan, C. (1999). Issues of Sustainability in Tourism. Tourism Management 20(2): 177- 177. Smith, M.D. and R.S. Krannich. (1998). Tourism Dependence and Resident Attitudes. Annals of Tourism Research 25(4): 783-802. Smith, T. and A. Haley. (1999). Residents‘ Opinions of Tourism Development in the Historic City of York, England. Tourism Management 20(5): 595-603. 426 BRIDGING THE GAP BETWEEN INSTITUTIONS OF HIGHER EDUCATION AND THE INDUSTRY – EXPERIENCE OF A RECOGNIZED INDIAN INSTITUTE IN BRINGING STUDENTS AND INDUSTRY TOGETHER Vivekanand B Khanapuri National Institute of Industrial Engineering (NITIE) NITIE, Vihar Lake, Mumbai, India. Pin Code – 400087
[email protected],
[email protected] Mayank R Khandelwal National Institute of Industrial Engineering (NITIE) NITIE, Vihar Lake, Mumbai, India. Pin Code – 400087
[email protected] ABSTRACT Higher education is a topic that has taken a back seat in a country like India where the focus is to provide basic education to the masses. This paper takes a look at the current state of higher education in the country. It has been concluded that although the current state of affairs is not promising, corrective action can improve the situation. The case of an Indian institute of higher education has been discussed in the paper. This institute has achieved excellence in professional education by encouraging an innovative concept which bridges the gap between the academia and industry. INTRODUCTION India has been experiencing phenomenal economic growth and it can be attributed to the following three factors: Regulatory changes, Change in the Government‘s attitude and Availability of educated human capital. But many experts believe that although the first two factors will continue to remain a driving force, the availability of human capital may become a bottleneck for future growth. The reason for such skepticism is not based on only intuition but rather based on real statistical data about the state of education in the country. Future growth can be ensured only if India is able to provide higher education to the youth so that the future leaders and managers of this country will be well equipped to handle global challenges. Along with ensuring good quality higher education institutes, it will have to be ensured that these institutes do not impart age old knowledge that will be of no use when the students will join the industry. Thus the syllabus and the teaching pattern will have to be 427 contemporary so that the students will be able to make meaningful contributions to the institutions that they join. This paper makes an attempt to explore how higher education can be made meaningful and practical by bridging the gap between the institutes and the industry. One school of thought is that the more the students are exposed to the industry the better it will be for them when they move out of institute. This has been practiced by a select few institutes in India and one such institute is ABCD. ABCD is an autonomous institute that has only post graduate courses and gets funding from the Government agency. It has its board of governors who provide the strategic directions and a well defined structure for the tactical and operational activities. Furthermore, as an autonomous institute, lot of independence has been given to the students and professors to start new initiatives that make the course more practical and interesting. However, to understand the case and the context, a brief overview of the current status of education in India along with the SWOT analysis is presented in the following paragraphs. CURRENT STATE OF EDUCATION IN INDIA India’s Vision - To become a Knowledge Superpower by 2012 and Developed Nation by 2020 – Critical areas of growth identified - GDP must grow by 8-10% per year to reduce poverty from 26% to below 5% - through Knowledge based economy - To generate high quality professionals needed to create, share, use and manage knowledge - To make its presence prominent in exporting services and to become a desirable destination for Services, R&D and Manufacturing Current Data And Analysis In order to gauge where India stands as far as tertiary education is concerned, one must have a look at the global landscape. As per the latest data available with UNICEF the percentage enrollment in tertiary education is extremely low in India. India and China had enrollment below 20% in the year 2000. However, China has been able to break that threshold of 20% unlike India which still lingers in the 13% range. India has very poor enrollment percentage for tertiary education (13.48%) and that is a serious concern for the country. Also the number of male enrollments is 50% more than the number of female enrollments and this is another concern that needs to be addressed. FIGURE 1 is the graph that shows India is way behind advanced countries like Unites States and United Kingdom. It can be seen from FIGURE 1 that not only is there a dirth of good institutes in the country but the penetration of tertiary education is minimal. In addtion to the penetration of tertiary education, the growth in the number of Instiutions and the number of enrollements in the country is given in FIGURE 2. 428 FIGURE 1. ENROLLMENNT IN TERTIARY EDUCATION ACROSS THE WORLD (LATEST DATA – UNICEF) FIGURE 2 clearly depicts the growth in the number of institute and the number of enrollements in the country. Although the growth looks pretty healthy in both the number of institutions and the number of enrollments, the numbers are way behind other countries. As per the data available on the University Grants Commission (UGC) website, ―there are 388 Degree granting institutions (as on 16.8.2007) including under Section 2 (f) of the UGC Act, 1956. These Degree granting institutions comprise 221 State Universities, 24 Central Universities, 11 Private Universities, 114 Institutions Deemed to be Universities, 13 Institutions of National Importance and 5 Institutions established under State legislations. Of the 232 State universities (including 11 Private Universities), 161 universities are recognized by the UGC for grants under Section 12B of the UGC Act. The University Grants Commission (UGC) has been inviting fresh proposals each year for grant of autonomous status to eligible colleges under its Scheme of Autonomous Colleges. The number of Autonomous Colleges has grown from 204 as on 31.3.2005 to 265 on Dec 2007.‖ There is a significant rise in the number of autonomous universities in the country from 2007 till date but when a closer look is taken at these new institutes, it can be seen that most of them lack the infrastructure that is necessary for an institute. 429 FIGURE 2. NUMBER OF INSTITUTES AND ENROLLEMENTS IN INDIA 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 0 0 0 0 0 0 0 0 E n r o l m e n t s ( ' 0 0 0 ) N o . o f I n s t i t u t i o n s Year #REF! #REF! SWOT Analysis Strengths: • Covers all major disciplines like Sciences, Commerce and Arts • Higher education is in English medium which makes students globally competitive • Largely meets the manpower needs of the country • Has helped India become self-reliant in several areas Weaknesses: • Over-centralization i.e. lack of institutional autonomy and accountability has made the system very slow in responding to changes • Problems like variable quality, market mismatch and inflexibility plague the sector • Little knowledge creation – little interaction with economy, society and other academic/ research institutions • Difficulties in recruitment and retention of qualified teachers in critical areas Opportunities: • Knowledge a key resource for global competitiveness ( According to WEF report • India a key player in global knowledge economy – off-shoring, knowledge-intensive manufacturing • Opportunity to convert demographic surplus to economic strength Threats: • Regulatory system fails to maintain standards despite formidable entry barriers • Chaotic and unplanned expansion • Poor standards of academic research 430 Multifaceted Role of Professional Education The professional education plays a multifaceted role which includes dimensions such as educating people, codification of knowledge, interactive forums for knowledge sharing, and problem solving. Educating People: • Training skilled undergraduates, graduates & doctoral students Codification of knowledge: • Publications • Patents • Prototypes Interactive Forum: • Forming/accessing networks and stimulating social interaction • Influencing the direction of search processes among users and suppliers of technology and fundamental researchers Problem Solving: • Contract research • Cooperative research with industry • Technology licensing • Faculty consulting • Providing access to specialized instrumentation and equipment • Incubation services However, professional education in India has been marginalized and it is seen only as a means to a good career with better living standards. Everyone acknowledges that professional education is extremely important for the development of the people and the country as a whole but the gap lies in the lack of understanding of the multiple advantages of good professional education. As a result, the professional education system in the country continues to provide highly qualified individuals that are unemployable. Education is considered equivalent to knowledge with very little importance given to practical application. Thus, when a student completes the course and joins the industry, he has to be extensively trained in contemporary practices in the industry before he can produce any results for the company. These issues in the quality of professional education can be resolved by ensuring that the students are not only given theoretical knowledge but are also provided with ample opportunities to interact with the industry. This can be done in multiple ways one of which can be inviting industry experts to the institutes so that the students can interact with them and gain from their experiences. Another way could be giving the students a glimpse of the industrial issues by providing a platform where the students can work on real life problems in the industry. A best practice on similar lines is discussed in the subsequent case from India. 431 DISSOLVING THE BOUNDARY BETWEEN ACADEMIA AND INDUSTRY IN PROFESSIONAL EDUCATION - ABCD WAY Education is manifestation of knowledge. In a knowledge driven country like India, every professional education body needs to go for reform as ABCD did in past years. Education culture in ABCD is driven by knowledge, transfer of knowledge and deployment of knowledge. It believes in learning by doing. For past 40 years ABCD is creating professionals with expertise in various fields like Supply Chain, Marketing, Finance, Information Technology, Environment and Safety etc. To facilitate this process of putting the theory in practice, the institute (like many other institutes) has established its own Industry Institute Partnership Cell (IIPC). IIPC provides the faculty and the students with a platform where they can interact with different industries / institutions. In order to improve the productivity across the spectrum of industries in terms of size, the Cell targeted those sectors and the professionals where there was a real need of improvement. As the first step, IIPC targeted Small and Medium scale Enterprises (SMEs) and Non Government Organizations (NGOs). It is important to note here that, SMEs generate 70% revenue of manufacturing sector of India and is still the most neglected segment as far as efficiency improvement and industrial best practices are concerned. Another sector targeted by the Cell was the NGO‘s who, being primarily involved with different kind of activities with a social objective, lack a sustainable business model. Thus, the cell decided to find a self-sustainable business model for such NGO‘s. Some of the initiatives taken as Study Projects for the SME‘s include; conducting a seminar by the professors of ABCD on ‗Productivity Improvement‘ and ‗Credit Rating‘ for the members of Ghatkopar Industrial Estate. This seminar was linked up with ‗Ghatkopar Industrial Estate‘ annual membership meeting so that there was enough participation of the members for the seminar. The seminar generated lot of interest in the SME‘s top brass and they realized that professional help could help them resolve many issues that were nagging their industries. At the same time IIPC discovered a lot of untapped source of learning in the problems faced by SME‘s. That was the beginning of IIPC-SME relationship. A feedback form was designed and feedback was solicited from the executives who participated in the seminar. Based on the responses and enquires generated, IIPC-student members visited different SME‘s to study their business processes and patterns. Based on their observations and interaction with various stake holders the students discussed the problems with area faculty members of ABCD. The faculty members guided the student IIPC members to create proposal for improvement of current practices which was presented to the respective SME. In past few months IIPC has given ABCD numerous such platforms whereby the students deal with real life problem. A few caselets of the studies carried out are enumerated below; M/s. New Vimko Plastics (NVP) at Ghatkopar Industrial Estate requested the Cell to study the problem of Inventory. NVP is a Small Scale Industry (SSI), manufacturing plastic welding machines to fabricate plastic works. The students visited the company and the scope of the study project was identified. After comprehensive study and discussion, some recommendations were formulated. Finally IIPC delivered a totally revamped, technology driven and easy-to-use inventory system. IIPC also developed a material management system 432 to increase visibility of material requirement, inventory status, inventory turn and working capital. Another example is of M/S Swastik Heavy Structurals Ltd (Mumbai). IIPC was invited to help them with improving customer order management, Inventory Management and Procurement management. This work was followed by a 2 day training session on mini- ERP system at the organization for the different users. Another initiative is the concept of Extended Coursework. IIPC has initiated linking class room studies with real-time problem solving for the industry. One such case that can be discussed in this context is where a group 22 students, who were part of a course elective Business Process Re-engineering offered by the author, were given a field assignment to study the different business processes of M/S Nikhil Comforts (Mumbai). As a part of coursework the students were asked to work with IIPC to conduct a gap analysis for ISO implementation at M/S Nikhil Comforts. The group then delivered process mapping for all processes and made a study for ERP implementation in the company. This not only made the learning of BPR students more exciting but also helped IIPC in honing the skills of the future executives/consultants. The third category of the initiative called Knowledge Transfer (ABCD to Industry and vice versa) was launched by IIPC cell by entering into a symbiotic relationship with one of the oldest Industrial Association in Mumbai, Bombay Industries Association (BIA). The relationship is a long term one where BIA provides IIPC with the opportunity of real life learning and ABCD-IIPC provides BIA with knowledge and most recent findings in best practices. Along with consulting on real-time problems, IIPC also organizes full day workshops for BIA on a variety of topics like Productivity Improvement, Quality Improvement, New Product Development, Product Sales and Value Engineering. While IIPC recognized the need to impart knowledge to the SME sector, it also realized that there was a lot to gain from the experience of industry veterans. IIPC initiated an effort in which it acts as a channel for bringing industry experts to ABCD institute so that these veterans can share their experiences with the future leaders and managers of the country. Recently, IIPC invited senior managers from ‗Mahindra and Mahindra‘ to come down to ABCD campus and guide the students about advanced planner and optimizer tools. The industry experts gave the students a detailed idea about this feature of ERP and real life application of the same. Many believe that entrepreneurial thinking is the strength of India and it is the reason why Indian organizations are fast becoming global giants. IIPC cell also felt the need to Promote Entrepreneurial Thinking by conducting various talk session by owners of SSI‘s and SME‘s who discussed the way their companies evolved from humble origins to their current state. These entrepreneurs also presented their future forecasts about their firms which provided the students a firsthand chance to see how entrepreneurs think. One such case was the ―My Story‖ session by Mr. Ashok K. Jani – the Chairman and Managing director of Multi Arc India Ltd. on the topic ―Innovation and Entrepreneurship‖. In this session he shared with the students his experiences of a journey of 30 years as an entrepreneur. He also talked about various challenges faced by SMEs, mainly in recruiting talent, since the high paying service industry has made it tough for SMEs to tap talented people. He urged more and more students to venture into entrepreneurship. 433 The other sector which IIPC had targeted is the Non Government Organization (NGO) space. The cell did well to associate with NGOs that work with vulnerable communities, HIV infected people, mentally challenged children, under trial prisoners and other societal areas of concern. The IIPC also got associated with NGOs that are dedicated to acquiring, developing innovating applications, producing and disseminating high quality, low cost/no cost (LCNC) learning methods, tools and systems to bring about universalisation of elementary mathematics and science skills and competencies. The cell studied this segment and the challenges that were identified by them were as follows: • Funding - In order to keep up the pace and increase their activities, the NGOs require financial support for their programs • The NGOs don‘t have the expertise to market the product properly. Their products are mainly ―Push‖ type and not automatic picks for the customers • The products features are not competitive • The products are costlier than other available products as ―Economy of Scale‖ is not present • As a result they are not able to generate enough revenue for their initiatives and have to be dependent on outsiders for funds which not only delays but also hampers their initiatives • Lack of specialized resources for supply chain and marketing In order to address the above mentioned issues, IIPC started a project called ―SPARSH‖. The main intention of SPARSH was to create Self Sustainable business model for NGOs by giving them a platform to sell their products under one brand and to the larger section of society. Activities undertaken as part of project SPARSH were as follows: • Unite the NGOs under one umbrella and to promote the products developed by these NGOs under one brand name (SPARSH) to increase awareness amongst the general public • Tie up with CSR initiatives of corporate houses and have periodic exhibition at their sites • To provide NGOs with inputs to redesign their workshop layout so as to improve productivity and work environment conditions • Offload the tough task of selling of products from the NGOs and generate year round revenue through Corporate Exhibitions and tie-ups with Retailers • Manage Supply chain for their products for on-time delivery to Retailers • Work in association with NGOs to improve the product quality and packaging to increase the product acceptability in Market • Conduct market research for the relevant product categories and work closely with NGOs to develop products as per consumer requirements A case that can be discussed in this context is where IIPC brought ten Non Government Organizations under one umbrella to be part of NGO fair inside Larsen & Tuburo Ltd. (L&T, Mumbai) premise. Total Revenue generated in the fair was to the tune of INR 1,25,000 in a 434 span of two days. This 2 day fair was organized and coordinated by 25 students of ABCD institute in partnership with IIPC. These initiatives along with theoretical inputs given as part of the course curriculum has helped in dissolving the boundaries between the industry and the institute and thus providing the industry with talented pool of professionals ready for contributing to the economic growth of the country. CONCLUSIONS Although India is lagging way behind its competitors like China and Brazil as far as higher education is concerned, there is still time for the situation to become a crisis. India has achieved what it has on account of strong human capital; Strong – not only in numbers but also in quality. The youth has realized the importance of higher education to excel in their professional lives but what is lacking is appropriate resources both physical & intellectual that can groom them into successful leaders of the future. The institutes of higher education are plagued by problems like lack of funding, lack of autonomy, unwillingness of the best of the students to adopt teaching as their careers and the lack of quality syllabus and program structure. These problems have rendered the students passing out of professional education institutes unemployable. The corporate have time and again raised these concerns but so far they have fallen on deaf ears. However, the current regime at the centre has been responsive to the needs of the industry and has shown the willingness to correct mistakes of the past. One such measure has been increasing the budget allocated to education. Also the government is determined to start new institutes of excellence so that growth of the country can be fuelled by infusing new talent into the industry. What will reinforce the work done so far is introducing more and more interaction of the academia and the industry so that the students will be employable and will be able to tackle real life challenges at the onset. More institutes need to take up activities like IIPC initiated by ABCD institute. The need for early interaction between the industry and the students has been felt all over the world as it has been found to improve the perspective of students of post graduate professional education. This will be the right direction for all the institutes in the country to move in and it will go a long way in providing able leaders and entrepreneurs of tomorrow. 435 REFERENCES Agarwal, Pawan [2006], Higher Education in India: The Need for Change, Indian Council for Research on International Economic Relations (ICIER, Delhi) Working Paper No. 180 CABE Committee on Autonomy of Higher Education Institutions [2005], Autonomy of Higher Education Institutions - Ministry of Human Resource Development Department of Secondary and Higher Education, Report of the Central Advisory Board of Education (CABE) Committee Gasskov, Vladimir, Ashwani Aggarwal, Anil Grover, Aswani Kumar, Q.L. Juneja [2003] industrial training institutes of India: the efficiency study report, Subregional Office for South Asia ILO, New Delhi Kapur, Devesh and Pratap Bhanu Mehta [2005], Indian Higher Education Reform: From Half-Baked Socialism to Half-Baked Capitalism, CID Working Paper No. 108 World Bank Finance and Private Sector Development Unit[2005], India and the Knowledge Economy - Leveraging Strengths and Opportunities, South Asia Region and the World Bank Institute 436 SOCIAL NETWORKING SITES AND MARKETING OUTCOMES AN EMPIRICAL INVESTIGATION FROM AUSTRALIA Alexander Josiassen, Megan Willis, Jillian Hamill, Courtney Holmes, Luvna Munisamy, Nella Ortisi , Melissa Popovski, School of Hospitality, Tourism and Marketing, Victoria University Albert Assaf, Isenberg School of Management, University of Massachusetts
[email protected] ABSTRACT Sites such as Twitter, Facebook and MySpace, have grown in popularity in recent years. They draw large number of users encouraging them to connect with others on the site, create and engage in social groups, share information and make available images, music and video footage. This study looks at the effects of on-line interaction through social networking sites (SNS) through investigating the relationships between the frequency of use of SNS and the users view on how credible the information presented on the site is as a source of product- related information. It further investigates whether the users level of education and age impact on this relationship. Finally, the impact of these constructs in the context of SNS is tested for their impact on consumers’ propensity for recommending the product to their social network. This study reports the findings of an empirical study which sources data from 263 Australian respondents. Finally, the implications for marketing theory and practice are discussed. INTRODUCTION The online world provides many avenues for consumers to share their views, preferences and experiences with others. One of the fastest-growing areas of the internet is the phenomenon of social networking sites (Pfeil, Arjan, Zaphiris 2008). Sites such as Twitter, Facebook and MySpace, have grown in popularity in recent years. They draw large number of users (Bausch & Han, 2006) encouraging them to connect with others on the site, create and engage in social groups, share information and make available images, music and video footage (Pfeil, Arjan, Zaphiris 2008). Social networking websites allow a user to build and maintain a network of friends for social or professional interaction (Trusov, Bucklin et al. 2009). Through the exchange of quick and frequent questions and answers, users share ideas and resources, ask and answer questions and collaborate on problems of practice (Dunlap and Lowenthal 2009). Researchers are becoming increasingly interested in the area of social networking sites and how they influence group building and community behaviours in on-line settings (Pfeil, Arjan, Zaphiris 2008). The growing popularity of the on-line world and SNS has presented marketers with new opportunities to develop and improve the effectiveness of their 437 communication with their customers, allowing them the ability to take a new approach in acquiring and retaining customers (Wind, Mahajan & Gunther, 2002). One aspect of on-line communication is the phenomenon of on-line interpersonal influence (Senecal & Nantel, 2004), this pursues the basic principle of consumer behaviour where consumers have the ability to exert power and influence over one another (Litvin, Goldsmith & Pan 2008). This study looks at the effects of on-line interaction through SNS through investigating the relationships between the frequency of use of SNS and the users view on how credible the information presented on the site is as a source of product-related information. It further investigates whether the users level of education and age impact on this relationship. There has been little research completed within this area. Investigating the frequency of usage of SNS and their credibility as sources of product related information will assist managerial and academic understanding of how people use social networking sites. Are they used to build social capital? Are they used to gather product information that will eventually result in a purchase decision? Does the age or the level of education of the user impact on the frequency of use and the perceived credibility? Answers to these questions will identify the ways in which SNS are used and determine whether they are a reliable source of product information to consumers, which marketers can further capitalise on. The article proceeds as following: firstly, we present a review of the literature, and an elaboration of the proposition background will follow. Thirdly, we have formed the hypotheses that were empirically tested in this study. We then discuss the methodology that was employed to test the hypotheses and present our results. Finally, we discuss our results and their implications for marketing theory and practise. THEORETICAL BACKGROUND Our review of academic literature shows that social networking sites (SNS) are of significant importance and interest to the marketing fraternity due to their popularity, their ability to communicate quickly and widely and their apparent influence on users (Senecal & Nantel, 2004 and Litvin et al, 2008). SNS such as Twitter and Facebook are the latest trend in online communication (Pfeil et al, 2009) and the bulk of academic research has been conducted in the areas of how individuals represent themselves online (Dwyer et al, 2007), the social influence of SNS (Keller et al, 2003) and the reasons behind their extraordinary growth (Boyd & Ellison, 2007). Research into social networking as a marketing vehicle has focused on Word-Of- Mouth marketing. The effects of Word-Of-Mouth marketing have been well documented in on- and off-line situations (Mitchell & Dacin, 1996). Litvin et al (2008) points out that ―consumers imitate one another and talk to one another‖ and as advocated by Herr et al (1991), customers pay more attention to Word-Of-Mouth than traditional marketing because it is perceived as credible and generated by people having no apparent self interest in pushing a product. SNS‘ capability of spreading information widely and rapidly makes it a powerful tool in Word-Of-Mouth. This effect is coupled with the inherent trust between SNS contacts, or ‗friends‘. The rise of SNS‘ indicates a shift in the organisation of online communities. Whilst websites dedicated to communities of interest still exist and prosper, SNS‘ are primarily organized around people, not interests. As such, SNS‘ have evolved into large communities of people that identify with one another. Carroll (2007) points out that ―to the extent someone identifies with you, you can win that person's trust. It has to do with sharing a perspective, priorities or even a common enemy.‖ In this sense, SNS‘ become a powerful vehicle for Word-Of-Mouth marketing and information sharing. 438 Within online interaction, trust is not as necessary in the building of new relationships as it is in face-to-face encounters (Dwyer et al 2007). Research has also shown that in an online site, trust and the willingness to share information do not automatically translate into new social interaction (Dwyer et al, 2007). This demonstrates SNS ability to extend the product related information and word-of-mouth marketing phenomenon. FIGURE 1: PRIVACY TRUST MODEL Adopted from Dwyer et al, 2007 Research into credibility finds that credibility is judged by user‘s trust of the source ―[…] we tend to trust those we perceive as having nothing to hide‖ (Carroll, 2007). This is especially evident in SNS situations where Facebook members expressed significantly greater trust in both Facebook and its members, and were more willing to share identifying information. Research has found that young people use SNS and online communities more often that older people (Pfeil et al, 2009) and that various other background characteristics like the level of experience with the web in general have been found to have an impact on the communication and behaviour in online settings (Zaphiris & Sarwar, 2006). There have not been direct studies on the impact of level of education and SNS, however, there have been studies on education affecting internet usage and it is determined as having a low significance among students. To date there is little research on how older people use and adopt SNS for social interaction and social capital. HYPOTHESES According to recent research (Carroll, 2007), word-of-mouth plays an important role in enhancing both credibility and reliability of information gathered from SNS. One reason could be the people giving the information have no apparent self interest in the product. Other studies conducted on the effect of education levels and internet usage, argue that education does not heavily influence the usage of SNS as far as students are concerned. Moreover, despite the fact that little research argues that young people use SNS and online communities 439 more often than older people. Little research has been conducted on how older people use SNS for social interaction and social capital. The following hypotheses were developed based upon research covered in the literature review and the aims of this study. As previously noted, the key purpose for this research is to determine relationships between frequency of use and the perceived credibility of social networking sites as a source of product related information, as well as the effect of education levels and age on this relationship. Credibility refers to the objective and subjective components of the believability of a source or message. Research into online credibility fond that ―credibility is judged by user‘s trust in the source […] we tend to trust those we perceive as having nothing to hide‖ (Carroll, 2007). This is evident in SNS situations where Facebook members express their trust in both Facebook and its members by sharing identification information. H1: Consumers with more frequent use of SNS, find the SNS more credible as a source of product-related information than do consumers with less frequent use of SNS. Young people use SNS and online communities more often that older people (Pfeil et al, 2009). Existing research indicates that demographic consumer characteristics (e.g. experience with the Internet) have an impact on the communication and behaviour in online settings (Zaphiris & Sarwar, 2006). While we have not located any studies on the impact of level of education and SNS, research has examined how education affects internet usage. H2: Level of education of the consumer impacts positively on the relationship between frequency and the credibility. Currently, there is limited research into the role of age in relation to SNS for social interaction and social capital (Pfeil et al, 2009). Current literature tends to make generalisations about the age of Australian consumers using these SNS and the link to frequency and credibility. Thus, the following hypothesis is forwarded for testing. H3: Age of the consumer impacts positively on the relationship between frequency and credibility. METHODOLOGY A questionnaire was developed to collect the data needed to test the hypotheses and determine the relationships between the stated variables as well as whether or not these variables had an effect on credibility of social networking sites. The simple random sample method was used and included 263 respondents from a major Australian city. The questionnaires were distributed in person via mall-intercepts. The sample consisted of 39% men and 61% women. The questionnaire consisted of two sections. One measured respondents‘ familiarity with SNS and their frequency of use. This section relied on a seven-point Likert Scale with ‗1‘ representing Strongly Disagree, ‗4‘ representing Neutral and ‗7‘ representing strongly agree. Credibility was also tested in this section through means of four-item scale testing deceptiveness, believability, trustworthiness and credibility. Cronbach‘s Alpha tests the internal consistency of the four items comprising the scale. The measure of perceived credibility was found to be highly reliable in this study (α = 0.83). The other section of the 440 questionnaire collected demographic data including gender, age, income, education level and occupation. All constructs in this section were measured using single-item scales. RESULTS Hypothesis One predicted that consumers with more frequent use of SNS would find them more credible as a source of product related information than consumers with less frequent use of the SNS. The results of linear regression demonstrate that the relationship between frequency and credibility is significant and negative (p < 0.01; β = -0.203). Therefore it can be deduced that frequency does affect credibility in a negative manner, hence as frequency increases, the perceived credibility decreases. Hypothesis Two stated that the level of education of the consumer impacts positively on the relationship between SNS visitor frequency and perceived credibility. The linear regression results show that the relationship is not significant, however it is important to note that the results indicate a positive relationship (β = 0.058). This indicates that a study with higher degree of power may find evidence to support the suggestion that a higher level of education strengthens the negative relationship between frequency and credibility. The third hypothesis referred to the age of the consumer impacting positively on the relationship between SNS visitor frequency and perceived credibility. Moderated regression analysis shows weak signs of age being more significant than education (p = 0.106), however is still not at a level deemed statistically significant in this study. Contrary to education, age has a negative effect on the relationship (β = -0.93) which means that as age increases the negative relationship between frequency and credibility weakens. ADDITIONAL FINDINGS In order to provide further value for practical application of the research, the questionnaire included questions regarding respondent‘s willingness to use SNS for recommending products that they had been satisfied with. The level of willingness to recommend was tested with demographic data to determine the segments of the sample most likely to use SNS as a tool for recommendation. Among the demographic variables information which was tested (education, age, income and gender) only one were found to be significant. The one demographic indicating a relationship was age (p = 0.043; β = -0.258). This demonstrates that younger consumers may be more likely to use SNS to recommend products than are older consumers. Respondents with the highest levels of perceived credibility were also very likely to use SNS for recommendations (p = 0.001, β = 0.396). DISCUSSION An individual‘s perceived credibility of product related information on SNS is negatively affected by their increased frequency of use. This has been empirically proven as described in the previous section of this report. Hypothesis One suggested that frequency of use positively affected perceived credibility, a statement that has been proven incorrect. This implies that individuals may become more discerning due to increased familiarity and more adept at filtering out non-social related information. Rao, Gao & Ding (2008) suggest that individuals use SNS to meet socio-emotional needs rather than informational needs. This goes some way to explaining why product-related 441 information credibility may be reduced by frequent users. It suggests that whilst individuals do trust the sites for emotional needs they do not for informational purposes. The second hypothesis tested relates to education levels. It was hypothesised that higher levels of education would positively impact upon the relationship between frequency and credibility. Statistical analysis found that as education increases, it strengthens the negative relationship between frequency of use and perceived credibility. Reasons include that highly educated individuals are more likely to be sceptical of an opinion based forum and that they are more likely to conduct their own research into products and purchases. Hypothesis three suggested that the age of the consumer would positively affect the relationship between frequency and credibility. Upon analysis of hypothesis three, the research shows that age does impact positively on the relationship between frequency and credibility. Rao, Gao and Ding (2008) suggests that younger users are connected to acquaintances whereas older users generally have online contacts that are based on real-world relationships. This may indicate higher levels of trust for older users due to closer and more grounded online relationships. Social Networking Sites have been identified in academia as a useful tool for online marketing strategies due to their popularity; their ability to communicate quickly and widely and their apparent influence on users (see Pfeil et al 2009, Dwyer et al 2007 and Keller et al 2003). The research has shown that individuals who use SNS more frequently, are relatively young and are highly educated are less likely to perceive product related information on SNS as credible. Given that individuals use SNS to meet socio-emotional needs rather than informational needs as described by Rao, Gao & Ding (2008), it is the authors‘ advice that future research focus on the perceived credibility of online industry-specific forums such as tripadviser.com (Litvin, Goldsmith & Pana, 2008). The results of further research in to this area may result in significant learning‘s for marketing management. Limitations of the study provide the basis to recommendations for future research in relation to the effects of SNS and the relationships between variables such as credibility and frequency of use. Arguably the biggest limitation of the study was the collection method. Simple random sampling was used, instead of complete random sampling; therefore findings of the survey data cannot be considered a perfect representation of the population. Additionally, the survey was conducted in Melbourne and only a small sample of 135 respondents was used. In order to gain more accurate measures of attitudes in relation to SNS, larger samples, over a broader geographic area maybe used in conducting future research. This research is of particular relevance to practitioners using viral marketing techniques. Viral marketing, which is described as an explosive ―spread of product information through customer contact‖ (Businessdictionary.com 2009), relies on recommendations in order to maintain momentum. This research shows that a willingness to recommend is present in SNS users when they demonstrate a high level of perceived credibility. Marketing managers need to carefully consider what drives perceived credibility when adopting a viral marketing strategy. The results of the research indicate that as frequency of use increases, the perceived trustworthiness of product related information decreases. Customers pay more attention to Word-Of-Mouth than traditional marketing because it is perceived as credible and generated by people apparently having no self interest in pushing a product (Herr et al, 1991). Existing 442 WOM theory may be inappropriate to describe online WOM and its influence on evaluation and purchase (Brown, Broderick & Lee, 2007). As such it is recommended that future research measure the existing trust of the relationships users have specifically with other members of SNS, rather than with the sites themselves. Further to this, future research should quantify whether or not high-frequency users consider the sites purely a social forum and whether or not they consider the sites to have any informational value. 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Convergence marketing: Strategies for reaching the new hybrid consumer. Upper Saddle River, NJ: Prentice-Hall. Zaphiris, P., Kurniawan, S., & Ghiawadwala, M. (2007). A systematic approach to the development of research-based web design guidelines for older people. Universal Access in the Information Society Journal, 6(1), 59–76. Zaphiris, P., & Sarwar, R. (2006). Trends, similarities and differences in the usage of teen and senior public online newsgroups. ACM Transactions on Computer– Human Interaction (TOCHI), 13(3), 403–422 [ACM press]. Zikmund, W. (2003) Business Research Methods (7th Ed.), Thomson/South-Western. 445 THE BANKING NEEDS OF SMES IN AUSTRALIA: WHAT DO THEY WANT, AND HOW CAN BANKS DELIVER? Earl Jobling La Trobe University, Bendigo, Australia Postal Address: Regional School of Business Faculty of Law & Management PO Box 199 Bendigo 3552 Victoria Australia Tel: +61 3 5444 7418 Fax: +61 3 5444 7998 E-Mail:
[email protected] ABSTRACT While Australia is an island geographically, it has not escaped the effects of the global financial crisis. Developments in global financial markets have adversely affected the reputations of banks throughout the world. With reputation being fundamental to earning customer business and engendering loyalty, there have been calls for banks in Australia to reorientate their business strategies and reconnect with their customers. In answer to these calls, the current study undertakes in-depth interviews with a convenience sample of fifteen practising accountants and identifies what it is they perceive as being the key banking needs of small-to-medium-sized-enterprises (SMEs). Having identified these needs, the paper discusses measures by which banks can meet these needs and reconnect with the SME customer segment. The study offers marketing implications for banks that are providing or are planning to provide services to the SME customer segment in Australia. Key words: Banking, Global Financial Crisis, Small-to-Medium-Sized- Enterprises, Australia. INTRODUCTION Past research examining customer retention in the banking sector has been limited and has tended to focus on end consumers rather than on business customers. Very little research has been undertaken investigating customer retention in the business banking market, in particular, the SME market (Lam & Burton, 2006). A review of the literature indicates that the work of Nielsen, Terry and Trayler (1998) is the only study that has attempted to identify the bank selection criteria of SMEs operating in Australia. Their findings indicate that SMEs in Australia tend to deal with a single bank, and expect their banking partners to provide a number of attributes. The most important of these attributes is the willingness of banks to provide a long-term relationship. The next most important feature is the accommodation of credit needs. This is followed by the provision of competitive prices, efficiency in the 446 provision of daily operations, providing a personal banking relationship, and finally, convenience in terms of branch location. Whether the attributes identified by Nielsen et al. (1998) are still considered important by SMEs is open to debate. Obviously there have been significant changes to the banking environment since Nielsen and his colleagues conducted their study, the most notable of which has been the impact of the Global Financial Crisis (GFC). The GFC has damaged the reputation of banks throughout the world, albeit, less so in Australia than elsewhere in the world. Amongst the effects of the GFC in Australia has been the increase in the level of dissatisfaction of SMEs with there banking partners, and the increase in bank switching amongst the SME cohort (Drummond, 2010). The negative effect of the GFC on the SME customer segment supports the proposition that there is a need to re-examine what motivates SME customers in Australia to choose one bank over another. Using a qualitative research methodology, this paper sets out to identify what it is that SME‘s desire from their banking partners. The objective of the paper is to offer recommendations as to how banks in Australia can improve their image in relation to the SME customer segment. LITERATURE REVIEW The Australian Banking Industry – An Historical Overview Prior to the early 1980‘s the banking system in Australia was closed and highly regulated. Strict limits were placed on banks in terms of lending, and interest rate controls dictated what banks could charge on loans and pay on deposits (Pont & McQuilken, 2005). The closed nature of the Australian banking system changed in 1984 with the deregulation of the Financial Services Sector. The removal of interest rate controls and the easing of balance sheet requirements meant that banks had access to additional sources of funding for the purposes of making loans. These changes, along with the admission of foreign banks into the Australian market had a profound effect on the Australian banking landscape. Banks were no longer responsible for the rationing of credit with little if any risk exposure; instead, they were risk managers operating in a much more competitive environment whose success depended on their ability to manage the risks that were now an integral part of the deregulated system (Nielsen et al., 1998). The competitive pressures imposed by the deregulation of the Financial Services Sector meant that banks set about increasing their profits through the rationalisation of branch networks, the migration of transactions out of branches to low cost electronic service delivery, and the automation of back office processing (KPMG, 2003). While these structural and technological changes undoubtedly provided significant pecuniary benefits to the banking industry, the viability of these measures in attracting and retaining customers in the long term was being questioned. Numerous scholars including Joseph, McClure and Beatriz (1999) and Tomiuk and Pinsonnealut (2001) argued that depersonalised environments with minimal face-to-face interaction would do little if anything to engender satisfaction and loyalty amongst customers. The Global Financial Crisis And Its Impact On The Australian Banking Industry The global financial crisis has placed financial institutions under intense scrutiny. People and governments throughout the world continue to question the decisions that banks made that ultimately led to what has now become known as the global financial crisis. A key outcome 447 of the scrutiny that banks currently find themselves exposed to, is that their image has been seriously tarnished (Hanlon, 2009). While banks in Australia continue to perform strongly, with the major banks, Westpac, CBA, NAB and ANZ being four of only twelve banks in the world to have a double A credit rating, the Australian banking industry has not been immune to global developments (Norris, 2009). A tightening of credit conditions brought about by increased wholesale funding costs, coupled with a perception by customers that banks are profit driven with little if any regard for the needs and wants of customers, has cost the Australian banking industry a good deal in terms of reputation. With reputation being fundamental to earning customer business and engendering loyalty, there is a growing awareness amongst banking practitioners that banks need to reconnect with their customers. If banks hope to prosper in the future they need to reorientate both their internal practices and their business strategies (Hinchliffe, 2009). This poses the inevitable question, what form should this reorientation take. This paper offers recommendations as to how banks can reconnect with the SME customer segment. The SME Customer Segment In Australia A review of the literature indicates that a consensus does not exist as to what constitutes an SME, in this sense, it is critical to specify how the current study defines the term. For the purposes of the research, small-to-medium-sized-enterprises are defined as non-subsidiary independent firms that employ fewer than one hundred and ninety-nine full-time employees or their part-time equivalent (Australian Bureau of Statistics, 2003). The SME market in Australia is an important part of the business banking market. As at the beginning of 2007, the SME sector accounted for approximately A$140 billion in lending and A$200 billion in deposits (Fujitsu, 2007). The SME customer segment is perceived as a growth market, and all banks want to grow their share of the market. The global financial crisis may have afforded banks the opportunity to achieve this goal. Research undertaken by Westpac suggests that at present upwards of twenty percent of SME‘s in Australia are dissatisfied with their banking partners and are looking to switch banks; in 2008 this figure was less than five percent (Drummond, 2010). This marked increase in switching behaviour offers banks the chance to increase their share of the SME cohort. The potential exists for those banks that set out to meet and satisfy the needs of their SME customers to capture the market share of those banks that ignore the importance of the SME customer experience. However, in order to capitalise on this opportunity, banks need to be able to identify and understand what it is that SME‘s desire in their choice and retention of a bank. Research that focuses on understanding the banking needs of the SME sector provides a foundation from which banks can develop marketing strategies directed towards the retention of the SME customer segment. The Importance Of Customer Satisfaction And Customer Loyalty Banking practitioners in Australia claim that maintaining high levels of customer satisfaction is a priority in serving the SME customer segment (KPMG, 2003). Yet, as already stated, this is at odds with recent research which suggests that widespread dissatisfaction with the way some banks in Australia treated their SME customers during the GFC is helping to fuel a major increase in bank switching (Drummond, 2010). Clearly there is a disparity in views as 448 to what is required by banks to ensure that SME customers are satisfied with their banking partners. This disparity in views should be of concern to bankers. A number of studies including Beerli, Martin and Quintana (2004) and Hallowell (1996) have provided empirical evidence that customer satisfaction is a key driver of bank loyalty. Obviously customers that are satisfied are more likely to maintain a relationship with a bank, correspondingly, dissatisfied customers are more likely to seek out an alternative banking partner. At the same time, the homogeneity of the products/services offered by banks means that customer satisfaction is an important factor in differentiating between banks. Clearly customer satisfaction should be uppermost in the minds of bankers as they go about formulating SME retention strategies. Customer loyalty, like customer satisfaction, is of paramount concern to bankers. The ability to develop loyalty in customers is perceived as being a key factor in maintaining and improving the market share of banks and increasing their value (Beerli et al., 2004). The consequences of enhanced customer loyalty include: lower costs of servicing existing customers, reduced customer acquisition costs, and increased revenue (Reichheld & Sasser, 1990). Loyal banking customers are also more likely to engage in positive word of mouth and actively promote their bank to family, friends and colleagues. The culmination of the preceding points indicates that customer loyalty represents an important source of competitive advantage that offers an opportunity to banks to increase their profitability. METHODOLOGY The current study is of an exploratory nature. The exploratory nature of the research can be attributed to the fact that there is a dearth of research related to the relationship between banks and the SME customer segment (Lam & Burton 2006). Given the paucity of research investigating the relationship between banks and the SME sector, a qualitative approach seemed the obvious choice in identifying what it is that SME‘s desire in their choice and retention of a bank. Data was collected through in-depth face-to-face interviews with a convenience sample of fifteen practising accountants. Accountants were selected for the purposes of the study for two reasons. First, the nature of their profession necessitates that accountants have an appreciation as to what it is that SME‘s desire in their choice and retention of a bank. Second, accountants by their training and experience have an innate knowledge of the services/products proffered by banks; this places them in a unique position to provide valuable insights as to what it is SME‘s desire from their banking partners. A semi-structured interview schedule was used to obtain the perceptions of informants. Interviews were carried out throughout December of 2009 and January of 2010 and were recorded for the purposes of subsequent analysis. Interviews on average lasted thirty minutes. A number of informants were interviewed more than once for the purposes of clarification. Content analysis was used to analyse interview information. Content analysis is highly regarded as a research technique as it provides an effective means of systematically evaluating the symbolic content of recorded communications (Neuendorf, 2002). Content analysis is also particularly pertinent in fields where limited research has been undertaken (Lam & Burton, 2005). Interview data was coded and categorised using an inductive 449 approach until themes emerged from the data. Themes that emerged from the analysis of interview data are presented in the subsequent section. FINDINGS The opening question of the interview required that respondents offer an opinion as to whether the GFC had affected the relationship between SMEs and their banking partners. Overwhelmingly, respondents were of the view that the GFC had adversely affected the relationship. The key theme to emerge from interviews was that the level of dissatisfaction of SMEs with their banks had increased significantly over the course of the last year. Based upon discussions with their SME clients, respondents estimated that in the last twelve months the number of SMEs looking to switch banks had at least doubled and possibly quadrupled. At the same time, respondents made the point that while SMEs in Australia had traditionally engaged in long term relationships with a single bank, many SMEs were now looking to engage in split banking. In the minds of respondents, the reasons for the increase in bank switching and split banking were the same, namely, rate increases on loans, and increases in fees; both issues of which are expanded upon shortly. With regards to split banking, the consensus amongst respondents was that SMEs viewed it as a means of providing leverage in the negotiation of credit, that is to say, it enabled SMEs to play one bank off against others and then select the bank that offered the best deal in terms of fees, features and rate. A lot of SMEs felt that they received poor treatment by their banks during the downturn; this has left a bad taste in their mouth. SME‘s are angry and cynical about recent increases in rates and fees. They‘re really dissatisfied; in fact, they‘re more than dissatisfied, they‘re pissed off. Because of the shoddy treatment many of my clients received, many are looking to switch banks. Don‘t get me wrong, not all banks are bad, it‘s just that some banks are a whole lot better than others. The financial crisis has highlighted which banks are truly interested in their customers and which are just paying lip service to the whole notion of ‗where there for you.‘ The downturn has been a real eye opener to a lot of my clients. They‘ve come to the realisation that you can‘t afford to be dependent upon the one bank. You need to split your banking and offset the risk of receiving a bad credit deal; that way, if things go pear shaped, as they have, you‘ve got different banking options at your disposal and you can go with the bank that offers the best deal. Using multiple banks gives SME‘s leverage in negotiating credit deals. They can play one bank off against others and go with the bank that offers the best deal in terms of fees, features and rate. Having dealt with how the GFC had affected the relationship between SMEs and their banks, the remainder of the interview concentrated on identifying what it is that respondents felt that 450 their SME clients desired from their banking partners. A number of attributes were identified by respondents; each of these attributes is now addressed in the order of importance informants attached to them. Informants were unanimous in their opinion that price competitiveness in terms of rates and fees was absolutely critical to SMEs in their choice and retention of a bank. Put simply, SMEs don‘t want to be paying any more in rates and fees than they have to. While informants acknowledged that increases in rates throughout 2009 could in part be attributed to the higher wholesale funding costs imposed on the banking sector as a result of the GFC, and that increases in fees could be attributed to the new liquidity requirements imposed by the Australian Prudential Regulatory Authority (APRA), once again, as a result of the GFC; they did not believe that these arguments alone were sufficient to explain the extent of the rises in rates and fees throughout 2009. Informants claimed that their SME clients held a similar view and that the perception amongst SMEs was that banks were using the argument of higher wholesale funding costs as a smokescreen for the purposes of price gauging. In other words, in the minds of SMEs, some of the increases in rates and fees that took place in 2009 were unjustified and were more about increasing profits than about compensating banks for higher wholesale funding costs and the new liquidity requirements imposed by APRA. ―Many of my clients deal with XXX and were shocked when their annual overdraft fees doubled. There was no explanation as to why they‘d doubled; they just got a letter saying they‘d doubled. The bank could have at least put through a telephone call explaining the reason for the hike…they could‘ve explained that it was pretty much down to APRA, but they didn‘t, and this has cost them customers…stupid really. These same clients are now in the process of looking for another bank‖. ―Look, a lot of my clients think that banks have acted like pirates this year, you know, give us your money, or else. It‘s as though they don‘t care. Banks obviously don‘t understand the concept of elasticity; you know, cut your fees and increase your revenue‖. Businesses both big and small are really struggling to understand how banks can justify raising rates in excess of increases in the cash rate, it‘s like they‘re deliberately making it tough on their customers. The same with fees, some of the increases seem to defy logic. I‘m sure that if banks put their mind to it they could do better deals on fees, they just don‘t seem to be interested. I‘d estimate that thirty percent of my clients are looking to switch banks because of what they perceive to be the mercenary behaviour of their banks over the course of the last year. Amongst the problems caused by the GFC, the inability or unwillingness of banks to provide credit to the SME sector is deemed to be a major economic challenge that many countries currently confront. With regards to the provision of credit to SMEs in Australia, informants expressed the view that unlike banks elsewhere in the world, banks in Australia had continued to lend to the SME sector. This is not to say that credit accommodation was not an issue of concern. Informants felt that one of the outcomes of the GFC was the recognition by SMEs as to the importance of ensuring that banks were willing to be flexible with regards to the repayment of loans. Informants outlined how as a result of the GFC many creditworthy SMEs had experienced profit shortfalls in 2009, and that, while some banks had been 451 understanding and had gone out of their way to help their customers by temporarily altering the terms of their loan agreements so that it was easier to make repayments, other banks had shown little if any interest in assisting their customers during this difficult time. In the view of one informant, it all came down to ‗the leadership of the bank, some banks were truly customer driven and were thinking long term, whereas other banks were profit driven and focussed on the short term.‘ Informants maintained that SMEs had learnt from this experience and felt that in the future that SMEs would endeavour to deal with banks that had shown concern for their customers during the dark days of the GFC, or alternatively, they would engage in multiple banking relationships so that they could play one bank off against others in order to negotiate the best credit deal they possibly could. Finally, there was a consensus amongst informants that SMEs expected credit applications to be processed in a timely manner. Lengthy delays in the processing of credit applications were not appreciated by SMEs. Banks that are prepared to be flexible in regards loan repayments, particularly during bad times, like we‘ve got now, they‘re the ones that are going to increase their share of the market; they‘re the ones that SMEs are going to stick with. The way some banks conducted business throughout 2009 was bloody ridiculous. Some went out of their way to make it tough for their business customers. Their customers aren‘t going to forget that, they‘ll have a long memory. For businesses with a good balance sheet and solid cash flows it was just so over the top; is it any wonder that they‘ve started looking for another bank. Banks need to be flexible in the structure and maintenance of loans and approve financing decisions quickly. Businesses can‘t afford to wait months for a bank to approve a credit request. Over and above the issues already discussed, informants felt that relationship management was important to SMEs in their choice and retention of a bank. Informants contended that there was an expectation amongst the SME cohort that they be allotted a relational manager, sometimes referred to as a business banker, who could offer specialist advice as to what products/services would best meet their banking needs. Informants expressed the view that SMEs are desirous of a number of relationally based attributes from their business bankers, these include, continuity, accessibility, and dealing with a person who has an appreciation, or better still, an understanding as to the nature of their business. Look, people like continuity in their relationships, they like dealing with the same business banker. There‘s nothing worse than having to rehash your details whenever there‘s a change in your business banker, it‘s really annoying. SMEs want a long term relationship, hardly a surprise; the longer the relationship, the better the business banker knows what their business is about, and the better their advice. The ability to contact a relational manager quickly is really important to SMEs. They don‘t have the resources or expertise of bigger businesses. If they need help, then they really need help. They hate it when they leave a message and then have to wait days before their business 452 banker gets back to them. It makes them question whether the bank is even interested in their business. SMEs want to deal with a business banker who is not only knowledgeable of what the bank has to offer, but is also knowledgeable of their specific business. The final feature informants contended that SMEs desired in their choice and retention of a bank was convenience, more specifically, convenience in terms of branch location. Informants made the point that while SMEs viewed the capacity to conduct their banking affairs electronically as a time saving measure, most businesses are still heavily reliant on cash deposit facilities, and as such, require a branch to be close at hand. A number of informants also stipulated that having a branch nearby makes it easier for SME‘s to contact their relational manager if or when the need arises. They can just drop in and make an appointment without having the hassle of having to deal with a call centre. A branch presence is really important to SMEs. They need a local branch so that they can deposit their daily takings. SMEs can‘t afford to be carrying cash for miles; they need their branch to be within striking distance, preferably within walking distance. Having their bank close by means it‘s really easy for SMEs to get in contact with their business banker. It makes it easier for them to build a relationship with their business banker. In summary, the findings of the study suggest that as a result of the GFC SMEs in Australia are not as loyal to their banking partners as they once were, and also, that they are now more likely to engage in split banking. At the same time, the results of the study imply that SMEs in Australia are desirous of a range of attributes in their choice and retention of a bank, and that banks that deliver on these attributes are the banks that are most likely to increase their share of the SME market. The attributes identified as a result of the research can be categorised under four broad themes, namely, price competitiveness, flexibility and timeliness in the provision of credit, relational issues and convenience. Except for the order of the attributes, these findings, on the whole, are in agreement with the results of Nielsen et al. (1998). It is felt that the change in the order of the attributes can in large part be credited to the impact of the GFC. As stated, the GFC has had a negative effect on fees and loan rates in Australia, and because of this, it would seem that these two factors have increased in importance in the eyes of SMEs. The subsequent section of the paper discusses each of the themes identified above and provides recommendations as to how banks can improve their marketing efforts in relation to the SME customer segment. DISCUSSION As stated, the findings of the study infer that as a result of dissatisfaction with their banks SMEs in Australia are not as loyal to their banking partners as they once were. The evidence presented by the study suggests that there has been an increase in the number of SMEs switching banks, and that now, more than ever, SMEs are more likely to engage in polygamous or split banking. The increase in the level of dissatisfaction of SME‘s with their 453 banks highlights the need for banking practitioners to improve their understanding as to what it is that SME‘s desire from their banking partners. If banks have a more informed understanding as to what it is that SME‘s desire in their choice and retention of a bank, then they will be in a much better position to focus their resources on those issues that SMEs perceive as being influential in their choice of a banking partner (Ennew & Binks, 1996). For those banks that allocate resources on this basis, an opportunity exists for them to increase their share of the SME market at the expense of those banks that ignore the importance of satisfying the needs of the SME cohort. Targeting resources in this manner can help banks to develop and implement appropriate SME retention and profit maximisation strategies. It is well documented that over the course of the last year there have been loan rate rises and bank fee increases in the Australian market. The key driver of these rises has been the GFC. The GFC has led to an increase in the wholesale funding costs of banks and has prompted APRA to impose more stringent liquidity requirements on the banking sector (Searle & Shapiro, 2009). The findings of the study clearly indicate that the increase in fees and loan rates brought about by the GFC has had an affect on the SME customer segment. Informants were unanimous in their view that price competitiveness in terms of fees and loan rates was now of paramount importance to SME‘s in their choice and retention of a bank. Banks have a number of options at their disposal by which they can minimise the fees and loan rates that they charge the SME cohort. Each of these options is discussed below. The most obvious means by which banks can reduce loan rates and fees is to reduce their wholesale funding costs. One way by which this can be achieved is for banks to fund loans through domestic deposits which currently represent a cheaper form of funding than funds obtained via international markets. A number of banks in Australia, including Westpac and NAB have set out to increase their share of the SME market on the back of this strategy. Another mechanism by which banks can reduce loan rates and fees is to price their offerings on the basis of risk. Under risk profiling, the lower the risk profile of a customer, the lower the fees and/or loan rate that the customer is charged. For example, customers with a proven track record in terms of loan repayments would be treated more favourably then customers with a history of not making repayments on time. The benefit of risk profiling is that it enables banks to be flexible in their dealings with customers, something which the current study suggests SMEs find attractive in a banking partner. The successful application of this pricing strategy is dependent upon a bank having a comprehensive profile of a customer, which, in turn, requires that the bank has been engaged in a sustained relationship with the customer. This seems to suggest that relationship management; in particular, having an understanding as to the nature of a customers business should be a priority for banks as they go about trying to expand their share of the SME market. The final option available to banks to reduce fees and loan rates is through the bundling of products/services. If a bank can successfully entice a customer to conduct all of their financial business through the bank, i.e. banking, insurance, superannuation and wealth management, then there is enormous scope for the bank to offer significant discounts on what they charge the customer. Similar to the comments above, the key to this strategy is being relationally engaged with the customer. Banks that are relationally engaged are in a much better position to demonstrate to their customers the benefits on offer as a result of bundling. 454 Banks that can demonstrate the advantages of bundling stand to benefit a great deal in terms of customer retention, and as a consequence, customer loyalty. Over and above the issue of price competitiveness, a key finding of the study was that flexibility and timeliness in the provision of credit are important attributes that SME‘s desire in their choice and retention of a bank. Such a finding is to be expected when you consider that credit is absolutely crucial to the success of SMEs as it directly impacts on their day-to- day operations, and, in turn, their profitability (Lam & Burton, 2005). A number of other studies including Ennew and Binks (1996) and Nielsen et al. (1998) have noted the importance of credit to SMEs in their choice and retention of a banking partner. What is particularly interesting in regards the current study is the link between the provision of credit and split banking. The consensus amongst informants was that by playing one bank off against others SMEs perceived that they could negotiate improved credit deals in terms of rates, fees, and features. Informants shared a common belief that the perception amongst SMEs was that they obtained greater flexibility in the negotiation of credit by using multiple banks. In light of the perceived benefits informants believed SMEs attributed to polygamous banking; it is probable that a significant number of SMEs in Australia have multiple banking relationships. If this is the case, then banks need to identify and implement strategies that can help them to obtain lead bank status and increase their share of wallet of the SME customer segment. The comments of informants suggest that relationship management may be the means by which banks can set about satisfying SME customers and achieve these interrelated objectives. This study points to the importance of developing and managing SME customer relationships. Such a view is not new; a number of other studies have reported how relationship management can positively affect SME perceptions of their banks, see for example, Ennew and Binks (1999) and Madill, Feeney, Riding and Haines (2002). Arguably the most fundamental means by which banks can develop and manage relationships with the SME customer segment is through increased investment in branches and frontline staff, with special emphasis being placed on employing additional business bankers. The findings of the study clearly imply that being able to have a sustained relationship with a business banker who is also readily accessible is highly valued by the SME cohort. A number of banks in Australia including Westpac and ANZ have recently made significant investments in expanding their branch networks and in increasing the number of business bankers that they employ. Moreover, these same banks are looking to employ more business bankers in the future. It is early days, but anecdotal evidence suggests that the investments made by these banks has led to an improvement in their image amongst the SME cohort and has resulted in them increasing their share of the SME market. Finally, the study suggests that effective relationship management requires that banks implement training programs that equip staff, in particular, business bankers, with the skills necessary to meet the needs of the SME customer segment. Key amongst these needs is for business bankers to be able to proffer advice as to what products and/or services would best meet the requirements of their SME‘ customers. The provision of this advice necessitates that staff have an understanding as to the nature of their customers businesses. One way to achieve this is to for specialist business bankers to be trained. These specialist bankers can then focus exclusively on servicing sub-sectors of the broader SME market. Specialisation as 455 a means of attracting and retaining SME customers has been successfully utilised by the NAB who has specialist business bankers across a range of sub-sectors, including, agri-business, business services, education and health. Although specialist bankers focus on particular industries, they offer their customers a holistic approach to their banking needs. A key benefit of sub-market specialisation is that over and above keeping customers happy, it is a means by which banks can attract quality staff that see career opportunities in carving out a niche for themselves within the business banking market. The attraction of quality staff makes it much easier for banks to satisfy the needs of SMEs, thereby making it easier to attract and retain SME customers. In conclusion to this section, evidence has been presented in the paper that highlights the importance of banks developing and managing SME customer relationships. If banks can successfully implement SME relationship management strategies, then not only can they engender loyalty amongst their SME customers, they can also potentially increase their share of wallet of the SME customer segment. In light of the revenue and profit opportunities offered by the Australian SME market, it would be imprudent of banks not to try and satisfy the SME cohort and engender loyalty amongst the group. CONCLUSIONS This study offers significant insights as to what it is that SMEs in Australia desire in their choice and retention of a bank. The results show that the attributes SME‘s desire of their banking partners can be categorised under four broad themes or dimensions, namely, price competitiveness, flexibility and timeliness in the provision of credit, relational issues and convenience. The findings of the paper indicate that the key factor that connects each of these dimensions is relationship management. Strong evidence has been presented that suggests that banks stand to benefit from the development and management of SME customer relationships. However, it needs to be noted that the evidence presented in the paper is based on a qualitative study, and, as such, caution should be exercised in making generalisations from this research. It is recommended that a larger empirical study be undertaken to validate or refute the findings of the current study. 456 REFERENCES Australian Bureau of Statistics (2003). 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(1990). ―Zero Defections: Quality Comes to Services‖, Harvard Business Review, 68(5), 105-116. Searle, J. and Shapiro, J. (2009). ―Banks will keep blaming funding costs‖, The Australian Financial Review, 2 nd October, p8. Tomiuk, D. and Pinsonnealut, A. (2001). ―Customer loyalty and electronic-banking: A conceptual framework‖, Journal of Global Information Management, 9(3), 4-14. 458 HOW MALAYSIAN MANUFACTURING EXPORTS HAVE REACTED TO THE GLOBAL ECONOMIC CRISIS Filda Rahmiati Faculty of Technology Management and Technopreneurship, Universiti Teknikal Malaysia, Melaka
[email protected] Mulyaningrum Bakrie School of Management
[email protected] Md Nor Hayati Tahir Faculty of Technology Management and Entrepreneurship, Universiti Teknikal Malaysia, Melaka
[email protected] ABSTRACT The global economic crisis which originated in the USA following the subprime mortgage problem, caused damage to the world economy. The crisis, indeed, affected the Malaysian economy. Malaysian exports of manufactured products were hit hard by the sharp drop in demand from developed economies, since most destinations countries of Malaysia manufacturing exports have been affected by the crisis. This paper examines the current global crisis impact on the Malaysian economy, mostly on manufacturing export performance. The paper also highlights the ability of Malaysia in response to the crisis by increasing the productivity of its human capital development and adopting an export diversification market for enhancing the economic integration of Intra-Asian and Intra- ASEAN exports. Recommendations are made which it is believed will enable Malaysia to respond effectively to the worldwide crisis. Keywords: global economic crisis, manufacturing export, export diversification INTRODUCTION The current global economic crisis originating in the USA has brought enormous ramifications for the world economy. The crisis that was rooted in the US subprime mortgages spread the risk globally. Within a short time, the crisis affected the global financial system as well as the real economy throughout the Asia-Pacific Region (Mujeri, 2009). The effects of the global crisis have spread into developing Asian countries with significant speed and rapid force especially resulting from the highly globalized nature of the countries in the region and the contagious nature of the crisis. Overall, exports fell because of lower international demand and reduced trade finance. In developing Asia, the most obvious areas 459 of impact included currency and credit markets, exports, and social equity. The sensitivity has been heightened by the export-led growth strategies that most of these countries have followed thereby affecting export-related production and investment as well as softening domestic demand. The GDP growth rates fell leading to increased financial and fiscal stress, unemployment, poverty, and deprivations in the countries across the region (ADB, 2009, Hassan et al., 2009). In fact, the paper addresses issues relating to the global economic crisis impact on Malaysia‘s economic condition. Firstly, the paper explains the general effect of the global crisis to Malaysian economic conditions, later, it narrows down to the specific industry sectors. The continuous decline in exports is the main channel the global economic crisis has penetrated the Malaysian economy. The paper further analyzes the export manufacturing sectors that are mostly demanded by the developed countries which mainly suffered in the crisis. Last the paper provides two recommendations of human capital development and diversification of export trade which the author believes necessary to respond effectively to the worldwide crisis. THE EVOLUTION OF THE GLOBAL ECONOMIC CRISIS The crisis started by an assets bubble which was caused by an array of financial derivatives. The big housing boom in the US from 2000 to 2006 led to a sharp rise in subprime lending (Cyn, 2009). The subprime mortgages were repackaged and sold to global investors. That particular form of financial innovation spread the risk globally. At the same time, the interest rates were very low driven by the US Federal Reserve which provided extra liquidity in the global financial market. Furthermore, the global financial crisis that originated from the US subprime mortgages took a dramatic turn in September 2008 when Lehman Brothers filed for bankruptcy, Merrill Lynch was sold to the Bank of America, and the American International Group (AIG) which is the biggest insurance company in the world, would have gone bankrupt if not for a timely bail out by the US Federal Reserve. As a consequence, the broader impact of the subprime mortgages boom exploded into a housing and banking crisis with a cascading effect on consumer and investment demand (Abidin and Rasiah, 2009), as well as merchant banks which absorbed the impact to spread to the commercial banks (Krugman, 2009). The subprime crisis then worsened into a global financial and economic crisis, the worst since the Great Depression in the 1930s (Kawai, 2009). This crisis was different from other financial crises over the last several decades, not only in its breadth and magnitude, but in its origin. The crisis was global, thus, affecting almost all countries in the world, and its impact was devastating. The epicentre of this crisis was not a peripheral country but the United States, which is the largest economy in the world, and home to the most dominant global key currency –the dollar- and with the world‘s most sophisticated and developed financial system. EFFECT OF THE GLOBAL CRISIS ON MALAYSIAN EXPORTS 460 The global crisis did not originate in Asia, and indeed, the direct damage to the financial sector in Asia has been much less than in Europe and the U.S. However, the overall economies in Asia declined (Kawai, 2009). Most countries in the region showed double-digit declines in exports as shown in Figure 1. Large declines were seen in Singapore, Indonesia, Thailand, Malaysia and Philippines for 2008-2009. The effect of the global financial crisis on the global economy was far broader and more severe than earlier had been anticipated. Its depth and contagion across the global economy was unprecedented since the 1930s with several of the large industrial countries and a number of the regional economies having slipped into recession. While global efforts were intensified to try to counter the effects of the slowdown, risks remain on the downside and recovery is still likely to be slow and protracted. Under these circumstances, the Asian economies have been adversely affected. In many cases, the declines were greater than those seen during the bursting of the information technology bubble in 2000-2001. Nevertheless, Asian economies, especially Malaysia have been hit hard by the sharp drop in demand in the developed economies and elsewhere. FIGURE 1 : EXPORT GROWTH IN ASEAN ECONOMIES Source of Department Statistic Malaysia, 2005-2009 The bitter experience of the Asian financial crisis had already provided the incentive for Bank Negara Malaysia (BNM) to regulate the financial sector for better performance. The World Bank (2008) stated that the country‘s financial assets for foreign loans and non-performing loans (NPLs) had been one of the lowest registered among Asian economies for 2008. This statement led the Government to confidently say in early 2009 that Malaysia‘s economic fundamental were strong. Additionally, as stated by the Deputy Finance Minister, Datuk Kong Cho Ha, teling the Dewan Negara, Malaysia is only feeling the minimum impact of the global economic crisis and financial meltdown (Bernama, 2009). Furthermore, he reaffirmed that the country‘s economic fundamentals were sound and strong. Malaysia had not been directly exposed to the full impact of the global financial crisis. In his speech, he added that the country‘s national reserves were still strong at 37 per cent of the Gross National Product, a clear indication of the nation‘s surplus liquidity that could be used to generate economic activities. The country‘s banking sector was also stable, with a non-performing loan rate at 2.4 per cent and the risk weighted capital ratio at 12.6 per cent, far above the eight per cent limit of the international standards. On the contrary, the contraction in external demand gave a negative response, particularly in manufacturing. Manufacturing primarily is a target markets for developed economies that currently were in the crisis. The impact showed in the export performance of several other regional countries as well. The ongoing global crisis had a profound impact on the Asian and 461 Pacific region. As a result, the region‘s aggregate growth was expected to fall to 3.3% in 2009 (ADB Statistic, 2009) from a remarkable growth of 9.8% in 2007. The latest data (table 1) show that Malaysia‘s gross exports fell 18% from RM 185 billion in the third –quarter 2008 to RM 151 billion in the fourth quarter. Malaysia experienced a contraction in exports and imports from the fourth quarter of 2008. TABLE 1: GROSS EXPORTS ,IMPORTS AND TRADE BALANCE, MALAYSIA Value (RM Million) 2007 2008 2009 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Gross exports (f.o.b) 138,125 145,005 158,532 163,492 151,798 175,169 185,234 151,293 121,472 129,128 Gross imports (c.i.f) 117,065 122,383 130,273 135,093 124,972 134,525 143,474 118,639 88,802 102,611 Trade balance 21,059 22,622 28,259 28,399 26,826 40,644 41,759 32,654 32,670 26,517 % annual change Gross exports (f.o.b) 1.0 1.3 0.9 7.6 9.9 20.8 16.8 -7.5 -20.0 -26.3 Gross imports (c.i.f) 5.5 1.7 2.0 10.9 6.8 9.9 10.1 -12.2 -28.9 -23.7 Trade balance -18.3 -1.0 -3.8 -5.9 27.4 79.7 47.8 15.0 21.8 -34.8 Source: Department of Statistic, Malaysia, 2007-2009 The trade balance improved marginally in the first quarter of 2009 but dropped again in the second quarter. The trend in falling exports was not encouraging, as it showed a continuous decline in aggregate demand from external importers, which is the main channel through which the global financial crisis penetrated the Malaysian economy. THE MANUFACTURING INDUSTRY IMPACT OF GLOBAL CRISIS As consumers in developed economies abruptly cut back on spending in 2008 and at the beginning of 2009, demand for Asia‘s exports fell sharply, as shown in Figure 2. In February 2009, exports from China fell nearly 26 per cent compared to the previous year, while in Indonesia exports contracted by approximately 33 per cent. Similarly, the January 2009 export data for Malaysia and the Philippines were just as poor and indicated a year-on-year drop of more than 34 per cent and 41 per cent, respectively. FIGURE 2: REAL GDP BY SECTORS, ASIA, 2008-2009 (% Annual Change) 462 Source: World Bank: East Asia and Pacific Update: Battling the Forces of Global Recession (2009) The global crisis impacted Malaysia via the trade channel. For a country like Malaysia which is dependent on trade, therefore, if the country‘s dominant trade partners declined so its repercussions were felt throughout the economy. The evident is striking when we examine the structure of Malaysian exports. This structure clearly indicates the dominance of manufactured goods which accounted for approximately 82% of total exports (Nambiar, 2009). Within the category of manufactured goods, electronics, electrical machinery, and appliances were approximately 53% of the export share. There is little doubt that the exports of manufactured goods was particularly vulnerable to drops in external demand. Since the demand for electronics goods largely comes from developed countries which were hit by recession (particularly the US, Europe, and Japan), a decline in consumption in these economies is bound to have a negative impact on the exports of Malaysian manufactured goods. TABLE 3: REAL GDP BY SECTORS< MALAYSIA, 2008-2009 (%Annual Change) 2008 2009 Q1 Q2 Q3 Q4 Q1 Q2 Sectors Agriculture 6.5 6.3 3.3 0.5 -4.3 0.3 463 Mining and Quarrying 3.6 -0.5 -0.3 -5.7 -5.2 -2.6 Manufacturing 7.0 5.6 1.8 -8.8 -17.6 -14.5 Construction 5.3 3.9 1.2 -1.6 0.6 2.8 Electricity, Gas and Water 4.7 4.1 2.5 -2.6 -8.2 -1.1 Service Sub-sectors Wholesale and Retail Trade 11.8 12.7 9.4 5.9 -1.7 0.4 Accomondation and Restaurant 10.0 7.3 4.7 7.4 2.1 2.9 Transport and Storage 9.9 8.1 5.9 1.0 -3.9 -6.4 Communication 7.5 7.9 7.4 6.3 4.9 5.8 Finance and Insurance 9.9 7.5 10.0 3.5 1.2 3.3 Real Estate and Business Services 4.8 3.8 -2.0 -0.6 -6.7 3.0 Government Services 7.0 7.9 10.5 18.2 2.8 0.5 Other Services 5.0 5.3 5.3 5.3 5.2 4.5 Source: Department of Statistics, Malaysia 2008-2009 Table 3 showed the continuous decline in manufacturing which was the steepest in the export-oriented sector than in others sectors. The decline in manufacturing faced the full brunt because of the collapse in demand from developed markets. Manufactured exports dropped by 8.8% in the fourth quarter of 2008, a further 17.6% in the first quarter of 2009 and-14.5% in the second quarter. Additionally, Table 4 supports the statement that exports faced a contraction of 11.7% in the fourth quarter of 2008 and 19% and 22.3% in the first and second quarters of 2009 respectively. Disaggregating the data, semiconductor exports recovered slightly in the first quarter of 2009 but dropped sharply in the second quarter. Other electronics exports faced a severe contraction over both quarters of 2009. The most worrying fall was in manufacturing exports, and within the exports of electronics, electrical machinery and appliances. The decrease of these products was attributed to fewer exports of office machines and other machines and parts to the United States and Europe (Xinhua, 2009). Optical and scientific equipment, petroleum products, textiles, clothing and footwear also experienced a sharp fall in exports in the first two quarters of 2009. The sharper decline in exports to key markets in the first two quarters of 2009 left the Malaysian economy in a precarious situation. TABLE 4 : GROSS EXPORTS BY MAJOR DESTINATIONS, MALAYSIA,2008-2009 (% ANNUAL CHANGE) Major Sectors 2008 2009 Q1 Q2 Q3 Q4 Q1 Q2 Semiconductors -24.7 13.2 0.1 -17.5 3.6 -18.4 Electronic equipment & parts -2.5 1.0 -5.5 -27.2 -30.8 -27.0 Consumer electrical products 16.2 36.0 50.5 14.7 -29.9 -13.9 Industrial & commercial electrical products -9.3 19.8 18.1 -9.2 -22.4 -30.2 Electrical industrial machinery & equipment 0.0 3.8 -1.5 0.9 -19.5 -23.1 464 Household electrical appliances 9.2 -3.7 -2.7 -6.9 -29.2 -5.5 Total (Electronics and Electrical) -9.4 9.2 2.6 -17.2 -19.0 -22.8 Transport equipment 0.3 40.3 13.0 3.8 22.2 -17.0 Food 36.8 55.4 57.2 22.0 0.5 -20.7 Beverages & Tobacco 12.5 6.6 23.3 -2.5 -5.5 18.2 Textiles, clothing & footwear 3.3 5.7 3.1 -1.5 -6.2 -15.3 Wood products -9.5 -4.3 14.6 3.7 -24.9 -22.8 Rubber products 23.3 26.4 32.4 1.5 -8.3 -4.7 Paper & pulp products 16.2 17.2 19.5 -0.9 -10.9 -0.5 Petroleum products 96.7 56.3 67.8 -24.7 -40.8 -49.5 Chemicals & chemical products 6.8 27.3 23.0 -17.0 -29.8 -25.2 Non-metallic mineral products 14.2 42.0 55.1 22.8 14.3 6.1 Manufacturers of metal 26.9 8.4 18.5 -8.3 -30.2 -21.8 Optical & scientific equipment 7.2 22.1 -0.4 10.8 -13.0 -31.4 Toys & sporting goods 7.2 14.3 19.4 -2.0 -20.3 -17.9 Furniture & parts 0.6 -4.1 8.1 4.5 -13.5 -14.4 Other manufacturers -15.3 -11.2 10.8 23.5 8.9 38.5 Total 1.0 14.4 11.4 -11.7 19.0 -22.3 Source: Department of Statistics, Malaysia 2008-2009 RECOMMENDATIONS This paper provides two recommendations for Malaysia in order to lessen the affects of worldwide crisis. Recommendations explained are the social impact of structural adjustment, increasing the productivity of its human capital development and adoption a diversification of its export markets to enhance the economic integration of Intra-Asian and Intra-ASEAN exports These two recommendations , if implemented, should enable Malaysia to respond effectively to the worldwide crisis. Human Capital Development Economic development has critical and mutually reinforcing features involving human capital. Humans are the only ones who can create material value, while others focus on material development (including sustainable development) and target humans as the beneficiaries of the processes they create. Additionally, researchers study about human resources on an international scale indicate that humans can be seen as a key determinant to the success of globalizing strategies. Furthermore, organization attempting to succeed in a global business environment must invest in the acquisition and development of employees, and acquire effective managers throughout the world (Dowling and Welch, 2004; Drost et al., 2002; Schuler et al., 1993). The complex and ever changing global environment requires flexibility; however, the organization‘s ability to devise strategic responses may be constrained by a lack of suitably trained, internationally-oriented personnel. This section thus examines the employment and income effects of the 2008-2009 global crises and also existing policy targets to meet the objective to enabling Malaysia‘s human capital to compete in global markets and sustain material improvements in standards of living. A number of issues such as poverty levels, unemployment, and education and healthcare are discussed in the effect of human capital development. Unemployment and wage levels are among the immediate variables to be affected in a worldwide crisis. With exports falling and GDP contracting, the early problem faced by 465 Malaysia included retrenchment, which resulted in lay-offs. The worst hit sector was the manufacturing sector. Retrenchments were worst in the manufacturing sector as it continued to decline throughout 2008 until the first quarter of 2009. This resulted in more than 50% retrenchments from manufacturing sector. TABLE 5: RETRENCHMENTS, MALAYSIA, 2008-2009 2008 2009 Q1 Q2 Q3 Q4 Total Q1 Q2 No. of workers 2,397 2,821 1,379 7,254 13,851 12,590 7,470 Agriculture, forestry & fishing - 2 84 312 398 20 208 Mining 8 18 28 35 89 28 45 Manufacturing 1,415 2,080 2,618 4,901 8,396 9,778 5,307 Construction 42 44 32 81 199 100 336 Services of which: 932 677 1,235 1,925 4,769 2,664 1,274 Electricity, gas, and water supply 74 3 - - 77 5 38 Wholesale and retail trade, hotels & restaurants 339 405 176 1,132 2,052 483 318 transport, storage & communications 347 68 254 104 773 210 235 Finance, insurance, real estate 138 87 192 591 1,008 620 388 Other services 34 114 613 98 859 1,346 595 Source: Ministry of Human Resources, 2009. The slowdown in manufacturing productivity also restricted the country‘s capacity to achieve its vision 2020 goal of achieving developed status. The slowdown in GDP growth from the late-1990s was a consequence of Malaysia‘s failure to upgrade into high value- added activities. The main innovation deficiency facing manufacturing firms in Malaysia related to the lack of technological upgrading. On the other hand, the resourcefulness in the human capital supports the process of technology changes to lower production costs, shorten delivery times, offer continuous improvements in product and service quality, and provide flexibility in the labour force to step production up and down, as appropriate. Therefore, Malaysia needs to move to another stage of development to produce higher value-added products that can only be achieved in an innovation-driven economy dominated by technology-intensive operations. To ensure that a temporary shock is not converted into a severe permanent declines in the welfare of poorer household, social protection and human development should be implemented. There are many programs which have been shown in evaluations to be worth investing in by Government of Malaysia. The Malaysian Government should prioritize protection and expansion of those areas that most effectively buffer the impact of the crises on the poorest households (Ravallion, 2008). The Malaysian Government should accept the Keynesian strategy of expanding human capital development in the country to provide the 466 basis for raising wages and, in that way, support the upgrading of the Malaysian economy into higher value-added activities. In Keynesian strategy, a government has to intervene in the economy for the purpose to achieving full employment and stable prices. In addition, the current crisis has highlighted the urgent need for Malaysia to restructure its economy to stimulate a shift towards high incomes and a high value-added economy and society (Abidin and Rasiah, 2009). As a consequence, Malaysia should strengthen its human capital to enable it to successfully achieve the type of economic restructuring it needs. In recognition to the importance of human development, the Malaysian Government introduced various measures in stimulus packages covering areas such as employment opportunities, educational development, promotion of healthcare and social benefits, improvement housing requirements, and upgrading roads and the transport infrastructure (Abidin and Rasiah, 2009). As a result, the impact on the development of human capital will contribute to a better quality of life, increase in domestic demand for products and services, and reduce dependence on Government expenditures. Another implementation which the Malaysian Government should do in order to improve the productivity of its human development is by reducing precautionary savings. The Malaysian Government should spend more on health, education, and social security to reduce household needs for precautionary savings. A survey shows that high household savings rate in Asia are partly due to precautionary demand for savings as a result of low levels of government spending on social safety nets, including unemployment insurance, health insurance and retirement pensions, and on education. They need strategies to transfer more corporate savings to households to encourage greater consumer spending. Furthermore, they also need policies that promote small and medium-sized enterprises and service industries to better align domestic production with domestic demand. All the above strategies can be achieved which will lead to higher incomes and a high value-added economy and society. Export Diversification While the challenges are substantial, the crisis could also be an opportunity for Asia to fundamentally restructure its approach to development and bring about a more sustainable global balance- a new development paradigm for Asia (Kawai, 2009). Asia has become a leader in the world‘s manufacturing sector. This gives it an opportunity especially for Malaysia to become not only a major source of goods and services in production, but also a major source of demand. To rebalance growth, hence, developing Asian countries need to reinforce domestic and regional demand as well as revitalizing their domestic economies. Further diversification of export markets and increasing intra-ASEAN and Intra-Asian trade can widen the domestic demand base. Formerly, the composition of trade from intermediate input for the production of goods for final demand in traditional markets were sent to Europe and the United States hence, the need to shift towards meeting increasing final demand within Asia itself are now encouraging. Malaysia has a technology transfer unit in the Ministry of International Trade and Industry but its tasks are only limited to registering applications (Rasiah, 1999). Malaysia, purposely should pursue both strategies and remove incentives given to labour-intensive, low- technology and non high-tech industries of manufacturing industries to technological 467 improvement. The industrial policy for at least the last 20 years has been centred on increasing export growth. The government has tackled employment generation and poverty eradication through export-led economic growth, creating five-year plans and industrial policy largely premised on this assumption. The approach, however, must be re-evaluated and alternative scenarios must be devised to prepare for what could be a prolonged period of soft demand for Malaysian exports. Accomplishing strategies will be very difficult because some of the assumptions that have traditionally driven policy-making must be re-examined and replaced. Accordingly, new strategies to drive economic growth must be designed and implemented. In view of the recent and to some extent the continuing global crisis, Malaysia will have to readjust its growth strategies and shift away from its dominant emphasis on export-oriented growth, if the crisis is prolonged. Currently, support for the export-oriented policy comes from other elements in the policy landscape and involves a suitable industrial policy, export promotion institutions and strategies, and fiscal incentives. A reorientation can only be successfully accomplished if suitable alternative policies and strategies are selected and implemented. A reorienting strategy would function along three lines. One of the strategies is resources which would be shifted from manufacturing industries that are concentrated on exports to developed countries to industries and services that serve the domestic market. In developing countries exports remain one of the few channels that in the longer run significantly contribute to higher income per capita growth rates of a country. As a consequence, export diversification is one way to alleviate constraints of unstable global demand. Another issue relates to the competitiveness of a country‘s exports since globalization by accelerating cross-border trade which exposes countries‘ exports to global competition. To be successful in export diversification, a countries‘ exports need to be globally competitive to take advantage of leveraging world markets. Lederman and Maloney (2007) provide robust empirical evidence of a positive effect on export diversification on per capita income growth. Export diversification could help to stabilize export earnings in the longer run (Ghosh and Ostry, 1994; Bleaney and Greenaway, 2001). Agosin (2007) supports that export diversification has a stronger effect on per capita income growth than when a country‘s exports alone. Furthermore, in a dynamic cross-country panel model, Lederman and Maloney (2007) find some evidence to support diversification-led growth. Within country studies by Amin Gutierrrez de Pineres and Ferrantino (1997) as well as Herzer and Nowak-Lehmann D. (2006), they examine the link between export diversification and economic growth in Chile, and their findings suggest that Chile has benefited greatly from diversifying its export base. Maximising the growth potential for regional demand calls on encourage intraregional trade. A promising area is investment in infrastructure at both the national and regional levels to improve cross-border connectivity to achieve ―seamless Asia‖. SUMMARY Improving the productivity in human capital development and enhancing the economic integration of Intra Asian and Intra ASEAN are two recommendations believed to will enable Malaysia to respond effectively to volatility in international markets. In addition, the domestic resources available can be mobilised to mitigate the adverse impact of a worldwide economic and financial crisis. 468 REFERENCES Abidin, M. Z. and Rasiah, R. 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Cyn, Y.P. (2009), ―Global Economic Crisis: Impacts and Policy Options‖, Asia-Pacific Social Science Review 9:1, pp. 51-74. Department of Statistics (2007), Malaysian Economy in Brief 2007. Department of Statistics (2008), Malaysian Economy in Brief 2008. Department of Statistics (2009), Malaysian Economy in Brief 2009. Dowling, P.J. and Welch, D. (2004), ―Controlled variety: a challenge for human resources management in MNCs‖, Human Resource Management, Vol. 25 No. 1, pp. 55-71. Drost, E.A., Frayne, C.A., Lowe, K.B. and Geringer, M. (2002), ―Benchmarking training and development practices: a multi-country comparative analysis‖, Asia Pacific Journal of Human Resouces, Vol. 40 No. 1, pp. 81-104. Ghosh, A.R., and J. Ostry (1994), ―Export Instability and the External Balance in Developing Countries‖, IMF Staff Papers 41: 214-35. Hasan, R., J. Cain, andM. Magsombol (2009), Poverty Impact of the Economic Slowdown in Developing Asia: Some Scenarios, ADB Working Paper Series No. 153, Economics and Research Department, Asian Development Bank, Manila. Herzer, D., and F. Nowal-Lehmann, D. (2006), ―What Does Export Diversification Do for Growth? An Econometric Analysis‖ Applied Economics 38: 1825-38. Kawai, M. (2009), ―The Impact of the Global Financial Crisis on Asia and Asia‘s Responses‖, Crisis Developments and Long-Term Global Responses: Insights from Asia and Europe AEEF Conference, Kiel. Krugman, P. (2009), The Return of Depression Economics and the Crisis of 2008,New York: Norton. Lederman, D., and W. F. Maloney (2007), ―Trade Structure and Growth‖, In Natural Resources: Neither Curse Nor Destiny, D. Lederman and W.F. Malonet, eds. Palo alto: Stanford University Press. Ministry of Human Resources (2009) - available at http://www.mhr.gov.my/index.php?option=comcontent&task=section&id=19&Itemid =296 ;retrieved on 5 June 2009. 469 Mujeri, M.K. (2009), ―The Global Economic Crisis and Monetary Policy Implementation in Developing Asia: Experience, Challenges, and Policy Implications‖, United Nations Economic and Social Commission for Asia and The Pacific, Dhaka, Bangladesh. Nambiar, S. (2009), ―Malaysia and the Global Crisis; Impact, Response, and Rebalancing Strategies‖, ADBI Working Paper 148, Asian Development Bank Institute, Tokyo. Rasiah, R. (1999),‖Malaysia‘s National Innovation System‖, in Jomo K.S. and Felker, G.(eds), Technology, Competitiveness and the State: Malaysia’s Industrial Technology Policies, London: Routledge. Schuler, R.S., Dowling, P.J. and De Cieri, H. (1993), ―An integrative framework of strategic international human resource management‖, International Journal of Human Resource Management, Vol. 5 no. 3, pp.717-64. World Bank (2008), Review and Outlook of the East Asia Pacific Region, Washington DC: World Bank. 470 SEMIOLOGY SNALYSIS OF KFC’S ADVERTISING IN CHINA THE VERIFICATION OF THE DECiSION-MAKING MECHANISM, BASED ON CONSUMERS’ SOCIAL IDENTITY Guo, Yi Shan, Lina Huang, Lujin School of Business, East China University of Science and Technology 130 Meilong Rd., Shanghai, China, 200237 TEL: +86-21-64251656 FAX: +86-21-64252314 E-mail:
[email protected] ABSTRACT The advertisement which was considered as the important medium between consumer and brand is responsible to transmit the symbolic significance of brand. As a widely known brand in China, Kentuckey’s advertisement also has obvious difference in the different development. This article, first, analysis the development chronicle text of Kentuckey in the China in last 22 year, and induces its various stages and also the strategic demand.Then, selection classical advertisement in different stage. Then, using the principles and concepts of semiotics, analysis the various advertisements, transmits the mark implication from the objective angle，get the final informations of the ad as well as what these informations express. We can get the culture of brand and the social identity which thus refines from the advertisement.Finally we confirm the supposition, and obtain the conclusion: The process of Kentuckey brand construction has completed the construction and internalizes of consumers’ society identity very well. PREFACE Consumption Decision Theory from Perspective of Social Identity Reed II (2000) researched the role of self concept in the consumers‘ decision making on purchasing. He examined the interactions between social identity, social influence, social value, attitude and judgment in consumers‘ behaviors and decisions. Based on this, he developed the consumption decision theory from perspective of social identity and came up some key factors in the consumption decision theory. Americus Reed‘s consumption decision theory from perspective of social identity believes that the key factors in decision making include characters, self importance, relevance, self motivation, social classified motivation, multi confirmation and self apperception. All these factors are also the main factors of consumers‘ social identity. Model Based on Consumption Decision Theory from Perspective of Social Identity 471 Based on Reed‘s theory, Prof. Guo Yi and his graduate student Du Juan (2008) at Business School, East China University of Science and Technology, developed the decision mechanics for social consumers in their paper ―Research on Decision Mechanics for Social Consumers‖. The mechanic said that the social identity must meet two conditions to make social consumers to come out decision. The two conditions are: to be accessible and to be diagnosed. In other words, certain social identity must be salient and consumers can indentify it. Then, the assessment given by social identity on certain item can be diagnosed which will help consumers to make decisions. When social identity is activated and influences consumers‘ decision, it can be digested by consumers during the multi social confirmations and self consciousness development and becomes part of consumers‘ own concept and influences consumer‘s future decisions. Theories on Advertising Semiotics Advertising semiotics is based on theory and practice of semiotics, combining edging theories such as structuralism, narration, linguistics and sociology, to analyze the information delivered by text advertisement. Hu Liu (2009) said advertising semiotics can figure out why an advertisement is good, how an advertisement influences consumers‘ concept, how to make public understand the advertisement and provide industrial professionals useful hints. For F. Saussure was the first linguist who set up the concept of semiotics and he had great impact on semiotics, the research on advertising semiotics in China is based on his theory. The following are the four concepts used in this article. (1) Signifiant and Signified Signifiant and signified is the impression and concept. The two forms the complete signal. In the combination of signifiant and signified, there is a process called signification whose result is signal (Zhao Xiaobo, 2003). In semiotics, there are three relations between signifiant and signified, that is, shape signal, sign signal and symbol signal. (2) Syntagma and Paradigm Signals can deliver complete ideas via well organization (Yoshihiko Ikegami, 2003). There are syntagma and paradigm in signals. In syntagma, all the factors are connected via inter relations. In paradigm, all the factors are connected via non-inter relations (Kazunari, 2001). In advertising semiotics, syntagma and paradigm can deliver more extensive information (Liu Zhiming, 1991). Research Purpose Consumption decision theory from perspective of social identity was developed by theory research. There is no empirical research to test the theory. The article is to test the theory via empirical research on a world well known brand. Mark, Perkins and Reed II (2007) believed that the most intuitionistic way to establish brand is the advertising. So the article believes that advertisement is a good way to research on brands from perspective of social identity. According to Roland Barthes‘s advertisement semiotics, we will explain the symbol information, the social identity signals in this article, delivered by advertisement. Two sub- topics will be covered in the article. One is how advertisement releases the social identity signals. The other one is how advertisement activates consumers‘ passion in different periods for a brand. When picking up the sample, the brand must be able to reasonable. This article takes KFC (Kentucky Fried Chicken) as the sample. 472 METHOD According to the main steps used in text analysis, all ads will be refined to get the main factors and coded. Concepts and methodology in advertising semiotics will be applied in the research to figure out the signal delivered by ads. The following is the research on the ads used by KFC in Hong Kong via the method described above. The ads wad broadcasted in 1988 which can represent the ads used by KFC when it entered China market. This chapter will research on the text to get the information delivered by ads under guide of advertising semiotics. Ads description and factors refining The first scene of the advertisement describes the shapes of the fried chickens as the American fast food. The second scene describes that a group of fashion young people are in sightsee bus and waiter from KFC is delivering KFC to them. The scene comes to a young couple who are holding fried chicken in their hands. The young lady takes a bite of the fried chicken and shows satisfaction and happiness on her face. The third scene describes that a young couple is coming out and a group of young people are entering KFC. There are lots of people in KFC and everyone is very delighted to be there. The scene comes to a young man and lady who are enjoying the fried chicken. The last scene describes a lovely girl who is holding a bag of KFC fried chicken says ‗good taste‘. There is the bright and lovely background music which shows the energy during the ads. To analyze the ads, we can get basic factors. Coding on the factors, we can three level codes: first level codes, second level codes and third level codes. To make the analysis more convenient, we use letters with serial numbers to describe the result of encoding, such as R 1 , A 2 , etc. Refer to table 1. TABLE 1; THE THREE LEVELS OF ENCODING No. Factors First level code Second level code Third level code 1 A group young people in the bus Young people group one (R 1 ) Actors (R) The image of people（H） 2 The waiter in white in the bus Waiter (R 2 ) 3 The young lady standing at the end of bus Young lady one (R 3 ) 4 The young man standing at the end of bus Young man one (R 4 ) 5 A group young people walking towards KFC Young people group two (R 5 ) 6 The young lady sitting in KFC Young lady two (R 6 ) 7 The young man sitting in KFC Young man two (R 7 ) 8 The lovely girl Lovely girl (R 8 ) 9 Waiters in white on a tram brought KFC pieces for a circle of young people Sending chicken（A 1 ） People modality （A） 10 A young girl on the tram with a smile, is chewing her fried chicken pieces Biting the chicken with a smile（A 2 ） 11 A young boy on the tram, smiled and looked at the young girl Watching with a smile（A 3 ） 12 At the door of KFC, a group of young people are moving around and talking to each other in a smile talking with a smile （A 4 ） 473 13 A young girl in the KFC with a smile, is chewing her fried chicken pieces Biting the chicken with a smile（A 5 ） 14 A young boy in the KFC with a smile, is chewing her fried chicken pieces Biting the chicken with a smile（A 6 ） 15 In the end of the ad, a little girl with a smile holds a barrel of KFC Holding the barrel with a smile（A 7 ） 16 The crispy fried chicken which appear when the ad start The complete chicken（P 1 ） The products which are displayed（P） The image of product（F） 17 The fried chicken pieces in the hands of young girls on the tram The chicken which was bittened（P 2 ） 18 The fried chicken pieces in the hands of white waiter on a tram The chicken in the plate（P 3 ） 19 The fried chicken pieces in the hands of young girls and boys in the restaurant The chicken which was bittened（P 4 ） 20 The bucket full of chicken in the hands of little girl A barrel of chicken（ P 5 ） 21 The running trams The tram（T 1 ） Background picture（T） Background（B ） 22 The clean street The street（T 2 ） 23 The green trees on both sides of the street The tree（T 3 ） 24 The door of KFC The KFC restaurant （T 4 ） 25 The bustling KFC restaurant The KFC restaurant （T 5 ） 26 The happy music Background music（ M） Background sound（V） 27 ―KFC，the chicken of hometown‖ ―KFC，the chicken of hometown，good aftertaste‖ message（W） The corresponding analyze of signifiant、signified and signification,and the form process of sign In the above-mentioned encoding process，we can find that，the basic elements of advertising is the essential medium to convey advertising information. What they conveyed is the results of the first level encoding and can be defined as the first level signifier。This intuitionistic information forms concept when it is received by audiences. This is the result of the second level encoding and can be defined as the first level signified。 According to Roland Barthes, the signifiant can be stacked (Li Youzhen,1999). So, the second level encoding can be regarded as a signifiant which relatives to the third level encoding and forms the second level signifiant. The third level encoding forms the second level signified。These corresponding process of signifier and signified can be defined as the first level signification and the second level signification. Finally, they turn out to be the first level sign and the second level sign. (1) The first level signification The result of the first level encoding which is showed in table 1 can be defined as the first level signifiant. The concept which is formed in the audience from this information can be described by the contents of the second level encoding in the table 1 and becomes the first level signified. The result of this first level signification can be described as the first level sign. The first level sigenification is described as Sign（n=1,2,„„,27）。The first level sign is described as Sn（n=1,2,„„,5）. Refer to table 2. TABLE 2 : THE FIRST LEVEL SIGNIFICATION PROCESS 474 The first level signifiant The first level signification process The first level signified The first level sign Young people group one (R 1 ) Students look, a group, young（Sig 1 ） Actors (R) Group of young（ S 1 ） Waiter (R 2 ) White uniforms, young（Sig 2 ） Young lady one (R 3 ) Long hair, nice, young（Sig 3 ） Young man one (R 4 ) White T-shirt, handsome, young（ Sig 4 ） Young people group two (R 5 ) White-collar look, a group, young（ Sig 5 ） Young lady two (R 6 ) White shirt, nice, young（Sig 6 ） Young man two (R 7 ) Striped shirt, handsome, young（Sig 7 ） Lovely girl (R 8 ) Alstonia braid, little, Flower shirt（ Sig 8 ） Sending chicken（A 1 ） Both hands to present（Sig 9 ） People modality （A） Smile happily（ S 2 ） Biting the chicken with a smile（A 2 ） Smiling,holding chicken to bite（ Sig 10 ） Watching with a smile（A 3 ） Smiling, looking at carefully（Sig 11 ） talking with a smile（A 4 ） Smiling, talking to each other（Sig 12 ） Biting the chicken with a smile（A 5 ） Smiling, nibbling the chicken（Sig 13 ） Biting the chicken with a smile（A 6 ） Smiling, nibbling the chicken（Sig 14 ） Holding the barrel with a smile（A 7 ） Smiling, pick up chicken barrel with both hands（Sig 15 ） The complete chicken（P 1 ） Crisp, golden（Sig 16 ） The products which are displayed（P） Crisp, golden, delicious（S 3 ） The chicken which was bittened（P 2 ） Crisp, golden（Sig 17 ） The chicken in the plate（P 3 ） golden（Sig 18 ） The chicken which was bittened（P 4 ） Crisp, golden（Sig 19 ） A barrel of chicken（P 5 ） Golden, full（Sig 20 ） The tram（T 1 ） Driving, open-top（Sig 21 ） Background picture（T） Clean, bright, lively（S 4 ） The street（T 2 ） Wide, clean（Sig 22 ） The tree（T 3 ） Green, flourish, orderly（Sig 23 ） The KFC restaurant（T 4 ） Clean, bright（Sig 24 ） The KFC restaurant（T 5 ） Bustling, lively（Sig 25 ） Background music（M） happy（Sig 26 ） Background sound （V） Pleasant, cheerful （S 5 ） message（W） Simple, easy（Sig 27 ） (2) The second level signification The result of the second level encoding which is showed in table 1 can be defined as the 475 second level signifiant. The concept which is formed in the audience from this information can be described by the contents of the third level encoding in the table 1 and becomes the second level signified. The result of this second level signification can be described as the second level sign. The second level sigenification is described as Sign （n=28,29,30,31,32）。The first level sign is described as Sn,（n=6,7,8）. Refer to table 3. TABLE 3 : THE SECOND LEVEL SIGNIFICATION PROCESS The first level sign The second level signifiant The second level signification process The second level signified The second level sign Group of young（ S 1 ） Actors (R) Youngs like students and white-collars（ Sig 28 ） The image of people（ H） Youngs full of vigor （S 6 ） Smile happyly（ S 2 ） People modality （A） Forgather and talk happily（Sig 29 ） Crisp, golden, delicious（S 3 ） The products which are displayed（P） Crisp, golden, delicious（Sig 30 ） The image of product （F） Crisp and delicious（ S 7 ） Clean, bright, lively（S 4 ） Background picture（T） Bright, lively（Sig 31 ） Background（B） Bright and cheerful（ S 8 ） Pleasant, cheerful （S5） Background sound （V） Rhythm cheerful（ Sig 32 ） According to the analysis above of the signification process, we can get Figure 1. This figure shows the formation of the relationship between the signifier and signified of three levels. FIGURE 1 : ALL LEVELS OF THE SIGNIFICATION PROCESS AND THE RESULT SCHEMA 476 S 5 B R 1 R 2 R 5 R 3 R 6 R 4 R 7 A 1 A 2 A 5 A 3 A 6 A 4 A 7 R 8 P 1 P 2 P 5 P 3 P 4 T 1 T 2 T 3 T 4 T 5 M R A P T VB Sig 1 Sig 2 Sig 3 Sig 4 Sig 5 Sig 6 Sig 7 Sig 8 Sig 9 Sig 10 Sig 11 Sig 12 Sig 13 Sig 14 Sig 15 Sig 16 Sig 17 Sig 18 Sig 19 Sig 20 Sig 21 Sig 22 Sig 23 Sig 24 Sig 25 Sig 26 S 1 S 2 S 3 S 4 The 1st level signifiant The 1st level signification The 1st level signified/sign (the 2nd level signifiant) The 2nd level significatio n The 2nd level signified The 2nd level sign W Sig 27 H F B S 6 S 7 S 8 Sig 28 Sig 29 Sig 30 Sig 31 Sig 32 477 The Formation of Syntagma, Paradigm and System In this study, the story of advertisement can be divided into four main scenes. So, there are four chains of syntagma at horizontal level. Its constituent elements were showed in the horizontal bars of Table 4. On the other hand, according to the results of the second level significantion process, we can find that the comparative element in different kind of scenarios can be summarized into three categories, such as the people image, the product image and the background. So, there also are three chains of paradigm at vertical level. Its constituent elements were showed in the vrtical bars of Table 4. Finally, the advertisement system is composed of four chains of syntagma at horizontal level and three chains of paradigm at vertical level. TABLE 4 THE SYSTEM FORMATION OF THE ADVERTISEMENT The chains of paradigm at vertical level The chains of syntagma at horizontal level The image of people： Youngs full of vigor The image of product： Crisp and delicious Background： Bright and cheerful Scene one： Tempting chicken none The complete chicken（P1） Message（W）; Background music（M） Scene two： The young people are gathering on the tram and enjoying the delicious Young people group one (R 1 ) The chicken which was bittened（P 2 ）; The chicken in the plate（P 3 ） The tram（T 1 ）; Background music（M）; The tree（T 3 ）; The street（T 2 ） Waiter (R 2 ); Sending chicken（A 1 ） Young lady one (R 3 ); Biting the chicken with a smile （A 2 ） Young man one (R 4 ); Watching with a smile（A 3 ） Scene three： The couples are dating In KFC and enjoying the stylish ambience Young people group two (R 5 ); talking with a smile（A 4 ） The chicken which was bittened（P 4 ） The KFC restaurant（T 4 ）; The KFC restaurant（T 5 ）; Background music（M） Young lady two (R 6 ); Biting the chicken with a smile （A 5 ） Young man two (R 7 ); Biting the chicken with a smile （A 6 ） Scene four： The food is delicious, child-friendly and recommended Lovely girl (R8); Holding the barrel with a smile （A7） A barrel of chicken（P 5 ） The KFC restaurant（T 5 ）; Message（W）; Background music（M） 478 Ultimate sign According to the analysis in Section 2.3, we can find that this ad of KFC conveyed three main signs: “youngs full of vigor”, “crisp and delicious ”, “Bright and cheerful” (they are the second level signs in this case). Furthermore, according to the formation process of the system,we can get the ultimate sign of the advertisement: Young people in lively fashion party time are enjoying the delicious foods. THE DEVELOPMENT STAGES OF KFC (CHINA) AND ITS PROPOSITIONS In 1987, KFC entered Beijing which is a ancient capital has a long history of food-culture. She started the history of development in this country which is the most populous in the world。The 22-year history of the development is the main target of the textual analysis in this paper。In order to have a comprehensive and objective understanding of this history, we collected a large number of secondary data which includs news reports, the network reviews, publications and other literature. Accordingly, we get the three stages of the development of KFC (China) and the characteristics of every phase. The development stages of KFC (China) Li Tao (2006) has proposed that the change of brand identity often represent a change of strategy in the catering industry. This paper argues that from 1987 to 1990, KFC is in the initial stage of entering the market. In 1991, KFC started to use the second-generation Logo in China. But its main demand which is attracting more youngs to enter the market have not changed. From 1997, KFC began to use another new logo with a clear distinction between the previous two generations in China. At the same time, the aspirations of strategic have gradually shifted to the in-depth localization. Its target market is "adult" and "household consumption". It began to expand the market base in China. After 2004, it officially entered into a new phase that is integrated into people's daily life. The strategic aspiration of this phase is also obviously different between the previous two phases. The objective of this phase is consolidating the market instead of opening up the market. Since then, the brand of KFC has become an important part of community life of Chinese. Based on the above analysis, the 22-year history of KFC (China) is divided into three stages which are defined as “fresh phase”, “base in Chinese phase”and“community life phase”. The time nodes, Logo signs, slogans and main strategic demands of every phase are shown in table 5. TABLE 5 THE FOUR DEVELOPMENT PHASES OF KFC IN CHINA Year Logo Main products Slogans Main strategic demands Phase characteristics 1987-1996 1987-1990 Original Chicken; mashed potatoes; KFC，the chicken of hometown The Expert It is for young people. With the brand positioning which Fresh phase(the social identity which is salient feature ) 479 1991-1996 cola; block chicken Hamburg; spicy chicken wings; chicken rice flower; grilled chicken, etc. of chicken frying； is fashion and wealthy of social responsibility, it attract those who seek new experiences and educated young people and their families. 1997-2003 Old Beijing chicken roll; mushrooms and chicken porridge; take-away meal for the whole family; suck-finger chicken, etc. Change for China and build a new kind of fast- food It expanded into other product categories, push the social welfare aspects the main marketing strategy, and constantly in- depth localization to occupy a larger market. Base in Chinese phase(the social identity which is able to be diagnosed) 2004 to now 2004-2005 Corn salad; juice mix; vegetable soup; series of cod ; Fried bread stick ; Victory Wings; Sichuan spicy tender beef Balanced Nutrition, healthy life ；There you have KFC；With KFC, a good taste of life It walk into Chinese daily life, the product continues to push new types,so KFC’s food covered all periods in our life, so that KFC store becomes an inseparable part of the community. Community life phase （the social identity which is able to be internalized） 2006 to now The propositions According to the research on decision mechanics for social consumers by Yi Guo and Juan Du, we can find that consumers make consumption decisions always need three main steps based on relationship between the brand and the self: the social identity shoud be salient; the social identity shoud be able to be diagnosed; the social identity shoud be able to be internalized. Therefore, in this paper, the analysis will be based on such a general proposition: in three strategic phases, the ads of KFC communicated some positive messages to the consumers to make judgments and to help them build and internalize the social identity. Divided into the following three sub-propositions： Sub-proposition 1: in the first phase (ie, 1987 -1996 years), the information conveyed by advertisement of KFC make consumers feel that the characteristic of social identity is highlight to be salient; Sub-proposition 2: in the second phase (ie, 1997 -2003 years), the information conveyed by advertisement of KFC make consumers have enough choice to diagnose if the brand is corresponding with their social identity; 480 Sub-proposition 3: in the third phase (ie, 2004 to now), the information conveyed by advertisement of KFC help consumers to confirm the social identity repeatly and internalize it as a part of self-concept. In the next chapter, we will choose representative ads of all development stages of KFC(China)to do semiotic analysis to validate the three above-mentioned sub-proposition and then validate the general proposition. According to the above summary of the event of KFC, we selected three ads from 1988, 2003 and 2007. CONCLUSIONS The Ultimate Sign of Advertising The frst advertisement is one of the popular advertisements in 1988. With the analysis above, the final sign is young and fashionable people enjoy the crispy and delicious food in a party. This is the message which the advertisement tells the audience. The signs are able to prove the assumption: in the advertisement, customer can feel the social identity. The second advertisement was screening about 2002, and was an representative ads of KFC‘s second stage (the stage based in China) in China. By the semiotic analysis, we will see the ads ultimately conveyed three main signs (in the case is the second level sign, that is summing up the first level sign). The three second level signs embody the ultimate sign of the ads, that is: KFC who based in China has developed more and more delicious food, more and more people enjoy themselves here. While this is the message what the ads wants to tell its audience. The proof to hypothesis two of these signs are positive. The ads tells people that KFC has many goods what are closely related to China, what‘s more, leisure and Happy remain unchanged. The ads meet the relevance and the distinction in the Diagnosis process in social identity. The third advertisement was screening about 2004, and was a representative ads of KFC‘s third stage (the stage of Community life) in China. By the semiotic analysis, we will see the ads ultimately conveyed three main signs (in the case is the second level sign, that is summing up the first level sign), that is all kinds of happy people, all kind of delicious food and deep friendship. The three second level signs embody the final sign of the ad jointly, that is all kinds of happy people who are enjoying the delicious food in KFC always can feel the deep friendship. This is the feeling the ads wants to convery its audience. These signs can positively prove hypothesis three, all kinds of life situations in the ads totally tell us that KFC is everywhere in Chinese people‘s life. What‘s more, to the customers, KFC is always combing with happiness and reunion, and the social identity KFC offers has melted into the life of them. The summaries of three stages This paper was confirmed by the three main stages of strategy of KFC in 22 years. We pass through the different stages of a typical advertising text, and then we get the ultimate symbol of advertising communication. Table 6 presents the main results of this study. TABLE 6 THE SURVEY OF THREE STAGES 481 Year Phase The catchword The objective of stage The finally sign 1987-1996 Fresh phase KFC，the chicken of hometown The Expert of chicken frying； It is for young people. with the brand positioning which is fashion and wealthy of social responsibility, it attract those who seek new experiences and educated young people and their families. Young people in lively fashion party time are enjoying the delicious foods 1997-2003 Base in Chinese phase Change for China and build a new kind of fast-food It expanded into other product categories, push the social welfare aspects the main marketing strategy, and constantly in-depth localization to occupy a larger market. KFC has developed more and more delicious food base in China, and more and more people here are enjoying the pleasure 2004 to now Community life phase Balanced Nutrition, healthy life；There you have KFC；With KFC, a good taste of life It walk into Chinese daily life, the product continues to push new types,so KFC’s food covered all periods in our life, so that KFC store becomes an inseparable part of the community. When we have love and happy time in life, there is always shared with KFC Through the table, we can find that in the different stages, the goals of KFC's brand- building are different. But one thing is certain, that is the impression of this brand in the Chinese people‘s heart is becomes deeply. The theoretical explaination for the whole process of brand building Table 6 shows the main process of KFC’s brand building. So the second conclusion of this paper is a theoretical explanation for the process. According to Du, in her post-graduate thesis, the study from the perspective of social identity on consumer decision-making mechanism concluded that: the consumption process is essentially a construction process of social identity for consumer。It can be explained from three aspects:（a）A particular social identity must first be salient for consumers in order to identify them；（b）The assessment based on social identity of a particular object must be able to be diagnosed in order to guide the direction of the consumer decision-making；（c）After the social identity has been excitation and had influence in consumer’s decision making, the social identity may become a part of consumer self-concept through social introspection repeatedly, and then continued to impact on consumer’s decision-making repeatedly in future spending. This conclusion basis on the theory of Reed, and combines with the practice of consumer’s decision-making. In this paper, this conclusion is interpreted as conveying results of social identity which needs to be done at different stages of brand building. Here it is used to be the criterion for the conveying results of advertisers. Therefore, in the first phase of KFC brand building, the key is that, put forward what kind of social identity characteristics our, and if they are adequate to determine the highlight; The key of the second phase is that, social identity which is conveyed can whether make the audiences feel that the brand has a distinct personality enough, so that they can get some kind of identity or emotional expression; The key of the third phase is to represent the brand as a 482 sense of social identity which can be melted into the hearts of the audience, so that the brand can be integrated with the audience as an integral part of life. The effects of KFC’s ads in above-mentioned three stages can be expressed by Figure 2. FIGURE 2 THE THEORY EXPLANATION OF BRAND CONSTRUCTION OF KFC It can be seen that, the symbol information received from the analysis of typical ad of KFC’s three-phase is in line with the process of building, diagnosing, and internalizing of the consumer’s society identity：In the first stage, KFC's advertising clearly put forward the Salient features of social identity, that is becomimg a fashionable and trendy people；In the second stage, KFC introducted more kind of local food while continued its fashionable and leisurely subjects,so that to attract consumers to have fresh experience and also the self- diagnosis and repeat to confirm of social identity at the same time；In the third stage, the information from the ad of KFC embodies the characteristics of the brand which is near to people's lives, so that consumers just conside KFC as an integral part of their lives, and internalization of social identity become a natural choice for consumers’ decision-making. In summary, the reasons for the success of KFC in its brand-building can also be seen here. The first phase： Fresh Young people in lively fashion party time are enjoying the delicious foods The second phase ： Base in china The third phase ： Community life The person who want to experience the fresh The person who want to be relaxed and happy Living in different communities (all ages) Developed more and more delicious food base in China, and more and more people here are enjoying the pleasure When we have love and happy time in life, there is always shared with KFC Salient feature of social identity: fashion, trendy Diagnosability: Have more choices, all in order to enjoy the pleasure Internalization: Become a part of life, there is happiness in KFC Strategic Stage Target population Advertising signs Construction phase of social identity 483 REFERENCES Du,Juan, 2008, Research to The Formation Mechanism of The Consumer Decision-making Based on Social Identity Perspective, The Dissertation of East China University of Science and Technology. Forehand, Mark R., Perkins, Andy and Reed II, Americus, 2007, The Shaping of Social Identity: Assimilation Contrast Responses to Ad Exposure, Journal of Consumer Research, March. Hu, Liu, 2009, Analysis of How to Think Advertising from Semiotic Perspective, Business Modernization, v. 565, issue 2, pp. 174-175. Kazunari (Japan), translated by Qi, Yinping, 2001, Bart——The Joy of Text, Hebei Education Press. Li, Tao, 2006, The correct ideas and methods of brand positioning of dining, Hot Explore, November. Liu, Zhiming, Ni, Ning, 1991, Advertising Communication, China Renmin University Press. Li, Youzhen, 1999, An Introduction toThe Theory of Semiotics, Social Sciences Academic Press, January. Reed II, Americus, 2000, When What I think Depends on Who I am The role of Social Identity in Consumer Attitude Formation, The Dissertation of University of Florida. Yoshihiko, Ikegami (Japan), 2003, Introduction to Semiotics，International Culture Press. Zhao, Xiaobo, 2003, The Development and Practical Application of The Advertising Semiotic Theory in China, The Dissertation of Sichuan University. 484 RESEARCH OF THE RELATIONSHIP BETWEEN CONSUMERS BEHAVIOR AND SELF-IDENTITY OF MIDDLE INCOME EARNERS IN CHINA: USING THE YANGTZE RIVER DELTA AS AN EXAMPLE Huang, Lujin, Shan, Lina, Wang, Yibo Business School East China University of Science Technology 130 Meilong Rd., Shanghai, China, 200237 TEL: +86-21-64251656 FAX: +86-21-64252314 E-mail:
[email protected] ABSTRACT The research on the middle income-level consumer behavior has significance in social and economic research. Since the middle income-level’ self-identity has a trend of diversification, which significantly affects their consumption behavior. Through the control of the gender, occupation and income etc the paper explores the relationship between consumer behavior and the Chinese middle income earners from the self-identity aspect by taking samples from the Yangtze River Delta. INTRODUCTION China‘s middle-income earners began to rise in 1980s. As the numbers of this group increase, they play a greater role in China‘s consumption structure. Many scholars have studied middle-income levels from all aspects of their occupations, incomes, education, prestige, consumption, gender, race, taste, identity and sociopolitical attitudes, but the studies appear not to come to a common understanding (Butler & Savage, 1995), especially on their consuming behavior. In the book on The Theory of the Leisure Class by Veblen in 1994, the author described the conspicuous consumption of a newly rich class – the middle class. In his book, the middle class consumption was led by their conspicuous motivation which came from their social status, prestige, and their comparison and competition psychology; meanwhile, the middle class consumption also reflected their principles of money distinction and characteristics of wasting money. Chen (2001) thinks that the middle class consumption features in fashion due to their natures and social status, and it is easy for them to interact with fashion. He wrote that the middle class was the main force for spreading fashion and they accelerated the process and changes in fashion. Baudrillard (1998) indicated that the middle class consumption, to some extent, was symbolic consumption; they tended to attach importance to the symbolic value of goods; they enjoyed the social segmentation and personalized consumption, while symbolic consumption was able to meet their special needs well. Bouedieu (1984) indicated that due to their high incomes and education, the middle class consumption was kind of a 485 segment consumption, which brought them both status and taste segmentation and potential demand in consumption. Although many researches have discussed the topics relating to middle income consumption, different researchers have varying views. Usually these studies study the middle class as a whole, without studying specific sub-types. Now in China, there are significant differences in the aspects of gender, occupations, ages and value concepts among the middle income group. More important, the degree of their self- identity as the middle class is not consistent, which means that many middle class people do not identify themselves as middle class or are not clear what their identities are. Some studies demonstrate that social identity can affect a consumer‘s decision making process, thus, it affects the process formation of consumption behavior (Kleine, 1993). Therefore, in this paper we attempt to explore the relationship between middle income self-identity awareness and consumption behavior. In 1995, Elizabeth Balistreri, Nancy A. Busch-Rossnagel, and Kurt F. Geisinger published a paper, "Development and Preliminary Validation of the Ego Identity Process Questionnaire"(Balistreri, 1995), which presented a questionnaire to test self-identification in seven concepts, such as career, politics, religion, values, social level, gender and family. Using their questionnaire as a draft and also using the data of consumption behavior questionnaire developed by Regina Huang and Jennifer Tang (2008), we summarize the overall consumer concept, personal consumer behavior and family consumer behavior among the middle income people in China. We make the following hypotheses and try to verify them: H1. the level of middle income self-identity affects their overall consumer concept; H2. the level of middle income self-identity affects their personal consumer behavior; H3. the level of middle income self-identity affects their family consumer behavior. Each hypothesis can be analyzed using seven aspects: H1a: career concept self-identity has a significant effect on the overall consumer concept H1b: politics concept self-identity has a significant effect on the overall consumer concept H1c: religious concept self-identity has a significant effect on the overall consumer concept H1d: values concept self-identity has a significant effect on the overall consumer concept H1e: social concept self-identity has a significant effect on the overall consumer concept H1f: gender concept self-identity has a significant effect on the overall consumer concept H1g: family concept self-identity has a significant effect on the overall consumer concept H2a: career concept self-identity has a significant effect on the personal consumer behavior H2b: politics concept self-identity has a significant effect on personal consumer behavior H2c: religious concept self-identity has a significant effect on personal consumer behavior H2d: values concept self-identity has a significant effect on personal consumer behavior H2e: social concept self-identity has a significant effect on personal consumer behavior H2f: gender concept self-identity has a significant effect on personal consumer behavior H2g: family concept self-identity has a significant effect on personal consumer behavior H3a: career concept self-identity has a significant effect on family consumer behavior H3b: politics concept self-identity has a significant effect on family consumer behavior 486 H3c: religious concept self-identity has a significant effect on family consumer behavior H3d: values concept self-identity has a significant effect on family consumer behavior H3e: social concept self-identity has a significant effect on family consumer behavior H3f: gender concept self-identity has a significant effect on family consumer behavior H3g: family concept self-identity has a significant effect on family consumer behavior According to the literature review, a consumer‘s gender, marital status, occupation, age and income would influence the formation of their consumption behavior, so these factors are tested as control variables, then we explore the effect different types of the middle income self-identity awareness on their consumption behavior. METHODOLOGY The main questionnaire we use in this paper consists three parts: Part1 measures the level of respondents‘ self-identity, which mainly refers to the self-identification scale in "Development and preliminary validation of the Ego Identity process questionnaire" by Balistreri (1995), which contains seven aspects of occupation, political, religious, values, social identity, gender and family; Part 2 investigates the respondents‘ consumption behaviors, which mainly comes from the consumption behavior scale by Regina Huang and Jennifer Tang in 2008, which divided consumption behaviors into three dimensions: overall consumption concept, personal consumer behavior and family consumer behavior; Part3 reflects respondents‘ basic personal information, including: gender, age, position and so on. Each variable is measured on a Likert 7 point scale: 1 stands for completely disagree, 7 for fully agree. According to the definition of middle income earners, an annual income of RMB 200 thousand Yuan and above is taken as a middle income earner for research purposes. And because of capacity and time constraints, we concentrate our research target on the Yangtze River Delta which is the most intensive settlement of middle income earners in China. ANALYSIS Reliability and Validity Test Reliability can be defined as the ratio of true score variance to observed score variance. In this study, we use internal consistency reliability analysis, namely taking Cronbach‘s α index as the indicator to measure the consistency of items in our scales. Nunnally (1978) demonstrated that an α value 0.70 was a lower, but acceptable scale boundary value. In our study all subscales‘ α index are bigger than 0.70, so their reliability can be accepted. Validity means the credible level of an investigation getting the result of a behavioral characteristic which it is expected to get. In this study validity means content validity, and this is also supported by distinguishing validity and structure validity. 487 All the questions in the questionnaires of this study have been used in other papers, which had supported many scholars‘ research. Before fixing on the formal questionnaires, we reworked description and contents of some questions following a pre-survey, so our questionnaires in this research have a high level of content validity. Distinguishing validity means the capacity that questions could help us to distinguish characteristics of research objects. Commonly, one first sorts the scores got by all respondents from high to low, then ranks the highest 25% to 33% of respondents as the high group and the lowest 25% to 33% as the low group, comparing the means between the two groups by using a significance test (in most studies, the boundary of defining a high group and a low group is 27% at two tails). If a question‘s testing result (Critical Ratio) is lower than the significance interval (α<0.05), it has a high level of distinguishing validity. In this paper we measure the distinguishing validity level by making an independent sample significance test in both the high and low group separately, and the result shows all the questions‘ T values pass the test, so the questionnaire as a whole has high level distinguish validity. The ideal method to analyze validity is to measure structure validity by using factor analysis. All questionnaires are designed on the basis of previous literature and with the assumption that some kind of structure exists. We could detect the real structure by factor analysis, so examining whether the assumption is right or wrong. In the pre-survey, we eliminated the questions with low significance using an independent sample test and factor analysis to ensure an acceptable structure validity of the questionnaire. Dealing with the data collected from a formal survey, factor analysis showed that the common degree of all variables reached or exceeded 0.5; on the other hand, each variable had a high load on a factor (greater than 0.601), that indicated a high level structure validity. Correlation Analysis (1) Binary Correlation Analysis Binary correlation analysis is a way to test the relationship between two variables, which verifies whether a linear relationship exists or not. Binary correlation analysis is a simple form of statistical calculation. In order to test the assumptions in chapter 2, we analyze the correlation between dimensions of each variable initially. As we can see from table 1, there are correlation relationships between the self-identity variables of career concept, politics concept, religious concept, values concept, social concept, gender concept, family concept and consumer behavior variables of overall consumer concept, personal consumer behavior, and family consumer behavior. TABLE 1 : CORRELATION COEFFICIENT BETWEEN EACH DIMENSION Career Politics Religious Values Social Gender family Overall consumer concept .252 ** .239 ** .241 ** .260 ** 0.134 0.153 0.135 Personal consumer behavior .228 ** 0.154 0.124 0.141 0.072 0.121 -.031 Family consumer behavior .194 * .185 * 0.130 0.153 .190 * .215 ** 0.104 **p<0.01(2-tailed) ， *p<0.05(2-tailed)， N=407 488 (2) Partial Correlation Analysis Binary correlation analysis sometimes could not accurately reflect the correlation between two variables because there may be other factors that effect the variables, so we use partial correlation analysis to make up for this. Tables 2, 3,4,5,6 are the results of partial analysis using respondents‘ gender, marital status, type of work, ages and incomes respectively as control variables. TABLE 2: PARTIAL CORRELATION COEFFICIENT -GENDER Career Politics Religious Values Social Gender family Overall consumer concept 0.252** 0.257** 0.243** 0.267** 0.139** 0.165* 0.135 Personal consumer behavior 0.228** 0.166* 0.125* 0.146** 0.075** 0.129** -.032 Family consumer behavior 0.199** 0.161** 0.130* 0.145* 0.186* 0.200* 0.109* **p<0.01(2-tailed) ， *p<0.05(2-tailed)， N=407 Through using variance analysis earlier, we already know that there are significant differences of the politics concept in self-identity and family consumer behavior in consumer behavior between different gender groups, but no big differences of career concept, religious concept, values concept, social concept, gender concept, or family concept in self-identity and overall consumer concept, personal consumer behavior in consumer behavior between two gender groups. Comparing tables 1 and 2, we find that if we take respondents‘ gender as a control variable, the correlation coefficients of different dimensions in self-identity and consumer behavior would change, and some relations become significant when gender is considered, so gender plays an important role in the process of self-identity impacting on consumer behavior. TABLE 3 : PARTIAL CORRELATION COEFFICIENT: MARITAL STATUS Career Politics Religious Values Social Gender family Overall consumer concept 0.268** 0.241** 0.234** 0.266** 0.138* 0.161** 0.146* Personal consumer behavior 0.250** 0.157** 0.114* 0.149* 0.077* 0.132** -0.019 Family consumer behavior 0.190* 0.186* 0.134** 0.152** 0.189* 0.213** 0.101** **p<0.01(2-tailed) ， *p<0.05(2-tailed)， N=407 TABLE 4 PARTIAL CORRELATION COEFFICIENT: TYPE OF WORK Career Politics Religious Values Social Gender family Overall consumer concept 0.247** 0.237** 0.245** 0.256** 0.135** 0.147** 0.136** Personal consumer behavior 0.217** 0.149** 0.131** 0.134** 0.074** 0.108** -0.030 489 Family consumer behavior 0.198* 0.187* 0.129** 0.155** 0.190* 0.219** 0.104 **p<0.01(2-tailed) ， *p<0.05(2-tailed)， N=407 Similarly, comparing tables 1, 3 and 4, we find that if we take respondents‘ marital status and work type as control variables, the correlation coefficients of each dimension in self-identity and consumer behavior changes significantly. So we can say that marital status and work type play controlling roles in the process of self-identity impacting consumer behaviors. TABLE 5 PARTIAL CORRELATION COEFFICIENT: AGE Career Politics Religious Values Social Gender family Overall consumer concept .252 * .239 ** .244 .223 * 0.134 0.133 0.135 Personal consumer behavior .228 ** 0.154 0.124 0.201 0.088 0.121 -.031 Family consumer behavior .114 * .145 * 0.135 0.153 .190 * .226 ** 0.115 **p<0.01(2-tailed) ， *p<0.05(2-tailed)， N=407 TABLE 6 PARTIAL CORRELATION COEFFCIENT: INCOME Career Politics Religious Values Social Gender family Overall consumer concept .252 ** .243 ** .241 .260 ** 0.134 0.153 0.135 Personal consumer behavior .228 ** 0.166 0.144 0.141 0.072 0.121 -.029 Family consumer behavior .194 * .187 * 0.130 0.153 .192 * .214 ** 0.124 **p<0.01(2-tailed) ， *p<0.05(2-tailed)， N=407 But when we compare data in tables 1, 5 and 6, the result is different: when we take age and income as control variables, there is no significant change in correlation coefficients of self- identity and consumer behavior, indicating that the correlation relationships are still non- significant when adding the control variables. So we can say that age and income do not play an important role in the process of self-identity impacting consumer behavior. Multiple Regression Analysis In order to understand the relationship between the characteristics of consumer behavior and the self-identity, we use multiple regression analysis to test the impact of the self-identity on consumer behavior. In this test, we use the dimensions of the characteristics of consumer behavior as the dependent variables, and the dimensions of self-identity and the control variables which were shown to be effective as the independent variables. When doing multiple regressions, we test the variance inflation factor (VIF) to explain the multi-collinearity of the variables initially in case there is some multi-collinearity between the 490 independent variables. Here we use the software STATA 10.0 to undertake this work. Results are shown in Table 7. TABLE 7: THE VIF Variable VIF 1/VIF x4 1.58 0.633143 x2 1.47 0.681765 x1 1.33 0.754263 x6 1.30 0.771918 x5 1.27 0.784661 x7 1.24 0.806683 x3 1.21 0.824950 x10 1.09 0.915969 x9 1.09 0.917270 x8 1.02 0.976316 According to table 7, the VIF of all independent variables is under 10. So we can say that, there is no multi-collinearity between the independent variables, and that the work of multiple regression analysis is acceptable. Regression analysis of Overall Consumer Concept We use the Overall Consumer Concept as the dependent variable, and the dimensions of self- identity and the control variables which were shown to be effective as the independent variables, and do the regression analysis with the software STATA 10.0 which now makes the regression equation as follows: Y 1 =β 11 X 1 +β 12 X 2 +β 13 X 3+ β 14 X 4 +β 15 X 5 +β 16 X 6+ β 17 X 7 +β 18 X 8 +β 19 X 9+ β 110 X 10 In this equation，the overall consumer concept is shown by Y 1 , Career concept is shown by X 1 , Politics concept is shown by X 2 , Religious concept is shown by X 3 , Values concept is shown by X 4 , Social concept is shown by X 5 , Sex concept is shown by X 6 , Family concept is shown by X 7 , Gender is shown by X 8 , Marital Status is shown by X 9 , Type of work is shown by X 10 , and the regression coefficient is shown by β 1i (i=1,2,……,10).The Regression model of Overall Consumer Concept is shown in Table 8. Note: The sex concept is a kind of dimension of self-identity as an expression of how people think about his role as a man or a woman rather than the distinction of gender. And the ―gender‖ here is a control variable to help us to analyze the differences between men and women about the performance of relationship between consumer behaviors and self-identity. We put both of them into this equation in order to explore it in a further way. TABLE 8 REGRESSION OF OVERALL CONSUMER CONCEPT y1 | β 1i Std. Err. t P>|t| x1 | .1080209 .045435 2.38 0.018 x2 | .0462425 .053252 0.87 0.386 x3 | .1501355 .0467565 3.21 0.001 491 x4 | .110881 .0583665 1.90 0.058 x5 | -.0537814 .0669455 -0.80 0.422 x6 | .0375371 .0330923 1.13 0.257 x7 | .1070757 .0577072 1.86 0.064 x8 | -.0038252 .1098625 -0.03 0.972 x9 | -.1436195 .0724745 -1.98 0.048 x10 | -.1187247 .0865329 -1.37 0.171 _cons | 3.248208 .5522393 5.88 0.000 On this basis, we make a further heteroskedasticity test. The result shows that the statistical significance of Breusch-Pagan is 0.8949. So, we cannot reject the virtual hypothesis, and there is no heteroscedasticity in this Regression analysis. We can accept the estimation results of OLS, that is, the results of multiple regressions are acceptable. According to table 8, for the Overall consumer concept, in the seven dimensions of self- identity, only the regression coefficients of Career concept, Religious concept, Family concept and Values concept are significant（ p<0.1） . And in the three control variables, only the regression coefficient of Marital Status is significant（ p<0.1） . Thus, the contribution of the different dimensions of self-identity to the Overall consumer concept is different. The Career concept, Religious concept, Family concept and Values concept as a feature of the middle income group, are more inclined to the spiritual realm, so the effect on consumer behavior is shown through the form of the Overall consumer concept. The remaining numbers of dimensions such as the Social concept, Politics concept, Gender concept, etc., do not have a direct effect on consumer behaviors in general. The analysis also shows that the model containing the control variables in the regression analysis is better than the model without these control variables. Marital status as a control variable has a significant effect for middle income consumer behaviors. This result is also consistent with the analysis of variance. Regression analysis of Individual consumer behavior We use the Individual consumer behavior as the dependent variable, and the dimensions of self-identity and the control variables which were shown to be effective as the independent variables, and undertake the regression analysis with the software STATA 10.0. This makes the regression equation as follows: Y 2 =β 21 X 1 +β 22 X 2 +β 23 X 3+ β 24 X 4 +β 25 X 5 +β 26 X 6+ β 27 X 7 +β 28 X 8 +β 29 X 9+ β 210 X 10 In this equation, Individual consumer behavior is shown by Y 2 , the Career concept is shown by X 1 , Politics concept is shown by X 2 , Religious concept is shown by X 3 , Values concept is shown by X 4 , Social concept is shown by X 5 , Gender concept is shown by X 6 , Family concept is shown by X 7 , Sex is shown by X 8 , Marital Status is shown by X 9 , Type of work is shown by X 10 , and Regression coefficient is shown by β 2i (i=1,2,……,10). Then, we take Individual consumer behavior as the dependent variable to make a further heteroskedasticity test. The result shows that the statistical significance of Breusch-Pagan is 0.0103. So, we reject the virtual assumption, and there is heteroscedasticity in this Regression 492 analysis. We cannot accept the estimation results of OLS, that is, we need to use weighted least squares to make the regression analysis solve the problem of heteroscedasticity. The final regression result is shown in Table 9. TABLE 9 REGRESSION OF INDIVIDUAL CONSUMER BEHAVIOR y2 | β 2i Std. Err. t P>|t| x1 | .3032097 .0569023 5.33 0.000 x2 | .1591447 .0615325 2.59 0.010 x3 | -.0085928 .0580361 -0.15 0.882 x4 | .0260815 .069696 0.37 0.708 x5 | -.1316486 .0808625 -1.63 0.104 x6 | -.1339542 .0401611 -3.34 0.001 x7 | -.1613284 .0747093 -2.16 0.031 x8 | .0387192 .1327592 0.29 0.771 x9 | -.2102593 .1034283 -2.03 0.043 x10 | -.1880197 .0976634 -1.93 0.055 _cons | 5.189922 .7178561 7.23 0.000 According to table 9, for the Individual consumer behavior, in the seven dimensions of self- identity, only the regression coefficients of Career concept, Politics concept , Gender concept and Family concept are significant（ p<0.1） . And in the three control variables, only the regression coefficient of Marital Status and the Type of Work are significant（ p<0.1） . From the results, we can see that the effect on Individual consumer behavior of the Gender concept and the Family concept is contrary. That is to say, in the middle income group, the family's social status and family consumer behavior are often based on a sense of proportion. So if the family concept is stronger, then their individual consumer behavior will be less focused. This is what the result shows: the effect of the Family concept on Individual consumer behavior is negative. At the same time, the Gender concept of self-identity is strong which means that self-consumption is often inhibited. What is more, the data shows that when the Marital Status and the Type of Work are control variables both are significant and they have a positive effect on individual consumer behavior. This shows that the middle income group in a different marital status and engaged in different jobs have different Individual consumer behavior. This clearly explains that when one has a family, even as a member of an independent middle income group, personal consumption of time and effort spent will be changed. And the person, who is in foreign and state-owned enterprises which have different cultures, will also have significant differences in individual consumer behavior Regression analysis of Family consumer behavior We use the Family consumer behavior as the dependent variables, and the dimensions of self- identity and the control variables which were shown to be effective as the independent variables, and undertake the regression analysis with the software STATA 10.0. This makes the regression equation as follows:. 493 Y 3 =β 31 X 1 +β 32 X 2 +β 33 X 3+ β 34 X 4 +β 35 X 5 +β 36 X 6+ β 37 X 7 +β 38 X 8 +β 39 X 9+ β 310 X 10 In this equation, Family consumer behavior is shown by Y 3 , Career concept is shown by X 1 , Politics concept is shown by X 2 , Religious concept is shown by X 3 , Values concept is shown by X 4 , Social concept is shown by X 5 , Gender concept is shown by X 6 , Family concept is shown by X 7 , Sex is shown by X 8 , Marital Status is shown by X 9 , Type of work is shown by X 10 , and Regression coefficient is shown by β 3i (i=1,2,……,10). Then, we take Family consumer behavior as the dependent variable to make a further heteroskedasticity test. The result shows that, the statistical significance of Breusch-Pagan is 0.0132. So, we reject the virtual assumption, and there is heteroscedasticity in this Regression analysis. We cannot accept the estimation results of OLS, that is, we need to use weighted least squares to use regression analysis to solve the problem of heteroscedasticity. The final regression result is shown in Table 10. TABLE 10: REGRESSION OF BFAMILY CONSUMER BEHAVIOR x1 | .018426 .0393514 0.47 0.640 x2 | -.0232279 .0423272 -0.55 0.583 x3 | .0480628 .0412534 1.17 0.245 x4 | .0424376 .0467921 0.91 0.365 x5 | -.0046662 .0499982 -0.09 0.926 x6 | .0595386 .0289348 2.06 0.040 x7 | .1055622 .0496463 2.13 0.034 x8 | .1721614 .0941561 1.83 0.068 x9 | .0369311 .0686556 0.54 0.591 x10 | .0977131 .0754629 1.29 0.196 _cons | 3.097623 .4835583 6.41 0.000 According to table 10, for the Family consumer behavior, in the seven dimensions of self- identity, only the Gender concept and the Family concept are significant（ p<0.1） . And in the three control variables, only the regression coefficient of Gender is significant（ p<0.1） . The analysis of Individual consumer behavior shows that the Gender concept is significant and it has negative effect on Individual consumer behavior. And here, we find that a clear gender identity is often beneficial to the formation of family consumer behavior. Of course, there is a strong and positive relationship between the Family concept and family consumer behavior. Similarly, it is easy to understand that the gender factor as a control variable has a significant impact on family consumer behavior. That means that household consumption behavior of males and females are usually very different which is consistent with real life. CONCLUSIONS AND DISCUSSION The main purpose of this paper is to analyze the effect of self-identity on their consumer behavior of middle income earners which is represented by the Yangtze River Delta in China. 494 Thus, by the analysis using SPSS17.5 and STATA 10.0, the results of hypotheses are shown in Table 11. TABLE 11 TEST RESULTS OF THE HYPOTHESES H1a： Career concept of self-identity has significant effect on Overall consumer concept agree H1b： Politics concept of self-identity has significant effect on Overall consumer concept disagree H1c： Religious concept of self-identity has significant effect on Overall consumer concept disagree H1d： Values concept of self-identity has significant effect on Overall consumer concept agree H1e： Social concept of self-identity has significant effect on Overall consumer concept agree H1f： Gender concept of self-identity has significant effect on Overall consumer concept disagree H1g： Family concept of self-identity has significant effect on Overall consumer concept agree H2a： Career concept of self-identity has significant effect on Individual consumer behavior agree H2b： Politics concept of self-identity has significant effect on Individual consumer behavior agree H2c： Religious concept of self-identity has significant effect on Individual consumer behavior disagree H2d： Values concept of self-identity has significant effect on Individual consumer behavior disagree H2e： Social concept of self-identity has significant effect on Individual consumer behavior disagree H2f： Gender concept of self-identity has significant effect on Individual consumer behavior agree H2g： Family concept of self-identity has significant effect on Individual consumer behavior agree H3a： Career concept of self-identity has significant effect on Family consumer behavior disagree H3b： Politics concept of self-identity has significant effect on Family consumer behavior disagree H3c： Religious concept of self-identity has significant effect on Family consumer behavior disagree 495 H3d： Values concept of self-identity has significant effect on Family consumer behavior disagree H3e： Social concept of self-identity has significant effect on Family consumer behavior disagree H3f： Gender concept of self-identity has significant effect on Family consumer behavior agree H3g： Family concept of self-identity has significant effect on Family consumer behavior agree Although some hypotheses are not been verified, but which can be seen from the analysis, there is a significant correlation between the various dimensions of self-identity and consumer behavior. As indicated in Figure 1. FIGURE 1: RELATIONSHIP BETWEEN CONSUMER BEHAVIOR AND SELF IDENTITY .106 .159 .059 -.133 -.161 .107 .046 .111 .303 .108 Consumer behavior Career concept Politics concept Religious concept Values concept Self-identity Overall consumer concept Individual consumer behavior Social concept Gender concept Family consumer behavior Family concept 496 As can be seen from Figure 1, in our middle income self-identity, the dimension which is most closely linked with the consumer behavior is the Career concept, Gender concept and Family concept. That is to say, the middle income group with a clear view of the Career concept (i.e. make sure they are middle income earners in terms of their jobs), will become even more consistent with the classical consumer behavior of middle income groups, as well as the gender and family concepts. According to the above analysis, this paper has found the following major conclusions: (1) The hypotheses which have not been verified In this paper, there are more than half of the hypotheses which have not been verified. Excluding the data processing error, we consider it to be necessary to do some further analysis and interpretation for some projects which are relevant to our research. First, the results show that Political and Religious concepts have no significant effect on the overall concept of the consumer. This shows that the political and religious concepts do not have a significant effect on consumer behavior of Chinese middle income earners, even though they might often dominate the concept of a person's overall tendency. This is mainly because the political and religious concepts of Chinese middle income earners are ambiguous and unstable. Another concern which has not been verified is that the gender concept has no significant effect on the overall consumer concept. According to the analysis, the impact of the Gender concept to individual consumer behavior is negative, while to family consumer behaviors it is positive. Together, a gender concept does not have a concentrated impact on consumer behavior, because its effect on an individually-centered consumer and a family-centered consumer is in conflict. (2) The hypotheses which have been verified The hypotheses which are accepted are considered to be consistent with reality. The career concept of the middle income earners has a significant effect on the overall consumer concept and individual consumer behavior. Since the middle income earners who are rising in number and are a backbone of the Chinese society and economy, have a prominent professional view which is as a major feature of this group. This has been most vividly expressed in their consumer behavior, especially in their individual consumer behavior. This shows that having a high degree of professional identity of the middle income earners is usually associated with the majority of classical individual consumer behavior studies of middle income earners, such as in entertainment-oriented consumption, high level brand consumption to express their personalities, etc. Second, the Family concept has a significant effect on family consumer behaviors. That is to say that a strong family identity of the middle income earners usually means classical spending behavior of the families of the middle income earners, such as investment in education, family-oriented consumption, wealth management, etc. In addition, there is a noteworthy finding that the Gender concept of self-identity has a significant but opposite effect on individual consumer behavior. Specifically, the middle income earners who have a high Gender concept of self-identity is often inconsistent with the 497 individual consumer behavior of the general class of middle income earners, while it is consistent with the characteristics of family consumer behavior of the general middle income earners.. This finding provides an important phenomenon that those who identify more with gender roles as middle income earners; the more blurred their individual consumption. At the same time they will pay more attention to household consumption, such as investment in education, family-oriented consumption, wealth management, etc.. This conclusion which seems contradictory is just an inherent characteristic of Chinese middle income earners (e.g. a combination of tradition and modernity). Because of the effect of traditional gender division on consumer behavior, the middle income earners have to come to terms between individuality and the family. (3) About the control variables In the five control variables, the sex, marital status and type of work have a control effect on the relationship between consumer behavior and self-identity, while the ages and incomes are not significant in the control area. To explain this, the age factor is not significant because of the age is associated with marital status for the middle income earners and not just the age differences which can cause a notable impact on the variety of concepts between the middle income earners while only the change of marital status or the other social roles can make an important difference. What is more, the income is usually associated with the type of work. However, according to the analytical result, the type of work has a significant control effect, while the income dose not. It means that more often than not, the simple difference between incomes for the middle income earners cannot be the key point to affect consumer behaviors, while the type of work plays an important role in affecting the consumer‘s attitude because of different culture, different job stability and different career planning. Generally speaking, this paper has undertaken a preliminary exploration of the relationship between middle income consumer behavior and self-identity only from the perspective of identity, and it has discovered some useful information which can be relevant for further research. 498 REFERENCES Balistreri, Elizabeth, Busch-Rossnagel, Nancy A. and Geisinger, Kurt F., 1995, Development and Preliminary Validation of The Ego Identity Process Questionnaire, Journal of Adolescence, v. 18, pp. 179-192 Baudrillard, Jean, 1998, The Consumer Society, Sage Publications, London. Bourdieu, Pierre, translated by Richard Nice, 1984, Distinction: a social critique of the judgment of taste. Harvard University Press, Cambridge, England. Bulter,Tim and Savage, Mike (eds. ) ,1995. Social Change and the Middle Class . London : UCL Press. Chen, Simmel, 2001, Fashion Philosophy, Culture and Arts Press, Beijing, China. Goldthorpe, John, 1987, Social Mobility and Class Structure in Modern Britain, Clarendon Press, Oxford, England. Huang, Regina and Tang Yi, 2008, A Survey of the Consumption of Chinese Educated Professional Women, The Collection of International Accounting and Business Conference in 2008. Kleine, Robert E. Susan S.K. and Jerome B. K., 1993, Mundane Consumption and the Self: A Social Identity Perspective. Journal of Consumer Psychology, 2(3), 209-35. Nunnally, J.C., 1978, Psychometric Theory, Second Edition, New York: McGraw-Hill. Veblen, Thorstein, 1973, The Theory of the Leisure Class, Boston, USA. 499 INDONESIAN STUDENT PERCEPTIONS OF AUSTRALIAN HIGHER EDUCATION Philip D. Trebilcock LaTrobe University PO Box 199 Bendigo Vic 3552 Australia Phone: +61 3 5444 7264 Fax: +61 3 5444 7998
[email protected] ABSTRACT The Australian international education sector has experienced unparalleled recent growth. From a marketing perspective, there is an understandable desire for Australia to maximise these export earnings. Most recent research focus has tended to be directed to the needs and perceptions of students already arrived and studying in Australia. This paper begins research from the Indonesian end. It examines how Indonesian students perceive higher education in Australia and is a preliminary analysis exploring some of the implications of these perceptions on the marketing of higher education to Indonesian ethnic groups. Key Words: Indonesia, education, international marketing, development. BACKGROUND Despite the Global Financial Crisis, the Australian international education sector has experienced unparalleled recent growth. From 2007 to 2008 full-fee-paying international student enrolments in Australia grew by more than 20%, after 23% growth had occurred in 2008-09 (AEI, 2009). In 2008, international student enrolments in Australian schools, vocational educational facilities, higher education and ELICOS exceeded 500,000 for the first time. The acronym ELICOS, English Language Intensive Courses for Overseas Students, is only used in Australia. Australia is an active international marketer of education, being the fifth-largest provider of education to international students (Gillard, 2008). More significantly, Australia currently has the highest proportion of foreign students in its higher education system; 19.3%, compared to the OECD country average of 7.2% (Gillard, 2008). South-East Asian Demand 500 Table 1 illustrates the considerable ongoing and growing demand for Australian educational services emanating from neighbouring South-East Asian countries. Yao and Bai (2008) found that students of non-English speaking backgrounds placed Australian courses at a significant competitive advantage because of the importance of having an English language degree. This demand for English language proficiency is unlikely to abate in the short term as English increasingly becomes the language of business and international relations. A healthy 286% average increase in international trade in education services from ASEAN countries over the ten year period from 1997-98 to 2007-08 can be seen in Table 1. TABLE 1 : INTERNATIONAL TRADE IN EDUCATIONAL SERVICES : AUD $ MILLIONS: ASEAN COUNTRIES (1996-2008) Country 1997-98 1999-2000 2001-02 2003-04 2005-06 2007-08 10 Yr % increase Brunei Darussalam 7 8 11 15 17 21 320% Burma (Myanmar) 6 10 14 12 14 20 322% Cambodia 6 7 8 8 9 16 290% Indonesia 413 540 539 509 472 512 124% Laos 5 8 9 8 8 10 196% Malaysia 360 324 426 558 593 723 201% Philippines 19 24 34 30 47 87 455% Singapore 200 224 280 298 270 278 139% Thailand 157 179 296 376 405 552 351% Vietnam 78 127 135 137 187 365 467% Average ASEAN increase 286% Source: Compiled from Australian Bureau of Statistics, 5368055003 - International Trade in Services by Country, State, Detailed Services Category & Financial Year, 2007-08 Australian export earnings growth to Indonesia has not been as robust as other ASEAN nations (124% average annual growth compared to the ASEAN average of 286%). This may suggest that the Asian financial crisis has affected Indonesia more than other ASEAN countries. It may also suggest that educational services are not been marketed as effectively to Indonesia as they have been to other ASEAN nations. 501 What is clear is that the marketing of international educational services is economically very significant to Australia. Following export earnings from coal and iron ore, international education is Australia‘s third largest export earner with $11.7 billion of export earnings in 2006–07 (Gillard, 2008). In Victoria, education is the State‘s largest export earner, valued at $4.9 billion in 2008 – an increase of around $2.2 billion in the four years since 2004 (Business Victoria, 2010). The growth of the Australian education market has been assisted by Australian Federal Government funding. The ‗Study in Australia 2010‘ program has, for example, provided $3.5 million to promote Australia in existing major source countries China, India, South Korea, Indonesia, Malaysia and Thailand (AEI, 2010). The marketing message of this Australian government promoted ―Study in Australia‖ program has been definitive and definite: (AEI, 2010) 1. Graduates with Australian qualifications are distinctive because their skills are relevant, recognised and sought after by employers around the world 2. Graduates educated in Australia have a unique point of difference in their education, qualifications and life skills in an increasingly difficult global labour market 3. Graduates with Australian qualifications are achieving success in professional and personal pursuits around the world 4. Australian education providers give international students the skills, experience and exposure they need to embrace the opportunities of a globally competitive future. 5. Australia provides the freedom to achieve academic goals in a secure, English-speaking country. Research Aims & Paper Outline This paper begins research on how Indonesian students perceive higher education in Australia. It is a preliminary analysis exploring some of the implications of these perceptions on the marketing of higher education to Indonesian ethnic groups. This paper seeks to: 1. Identify the salient motivating factors influencing Indonesians students intending to study higher education in Australia. 2. Explore the implications of this data for Australia in marketing higher education to Indonesian ethnic groups. 502 The remaining sections of this paper are structured into five areas. Firstly, some of the existing literature on the marketing of education is reviewed. In particular, Ajzen‘s Theory of Planned Behavior (TPB) is discussed as a beginning to further research as to why Indonesian students choose Australia as their study destination. Then a brief introduction is given to three Indonesian ethnic groups who will be the focus of later research. Secondly, the methodology of this paper is given followed by section 3, Key Preliminary Findings. In Section 4, a brief introduction is given as to how future research could assist Australian Aid funding. Finally, some conclusions are made. LITERATURE REVIEW Given the size of the international education market, it is not surprising that there has been analysis of its performance and growth. However there are relatively few substantial studies that investigate transnational education from a marketing prospective (Chen and Zimitat, 2006). Australian research of the international education market has tended to be directed toward marketing education to Australia’s national economic interests (Joseph & Joseph, 2000). Research has therefore tended to be focused on:- 1. How to meet the needs of students enrolled in Australian educational institutions 2. The analysis of market trends and opportunities in education, and 3. The marketing and positioning of Australian education to the international marketplace - and especially to Asian markets. Much of this research has also tended to be narrowly directed to international students already living in Australia. Some of these studies are outlined below. TABLE 2 : RECENT INTERNATIONAL EDUCATION STUDIES Author Title Year Method of Research Research Undertaken 1. Mitsis, A., Foley, P. Culturally-anchored values and university education experience perception 2009 Multivariate analysis to test 6 hypotheses How values, gender and age affect student perceptions of their educational experience 2. Cuthbert, D., Smith, W. and Boey, J. What do we really know about outcomes of Australian international education? A critical 2008 Literature review The outcomes of education provided by Australian universities 503 review and prospectus for future research 3. Mazzarol, Choo and Nair Why Indian students choose to study in countries other than Australia 2001 Factor Analysis, Principal component analysis Influences on final country destination choice Joseph and Joseph (2000) researched a random sample of 200 Indonesian secondary students, seeking to understand the criteria that these students considered important in selecting an overseas study destination. ―Course and career information‖ and ―physical aspects and facilities‖ were identified as being of most importance (Joseph and Joseph, 2000, p.20). Significantly, it was found that past research had focussed ―mainly on either administrators or the faculty‘s perspective‖. Limited research had been directed to individual student objectives. Davis (1998) and Mazzarol and Soutar (2002) described a combination of ―push-pull‖ factors that influence the preferred destination choice by international students. In this study, economic and social pressures were seen to ―push‖ the student out of their home country, whilst a variety of ―pull‖ factors such as an awareness of the host country and its institutions were seen to draw students to their ultimate preferred destination country. Using Azjen‘s Theory of Planned Behaviour (TPB), Chen and Zimitat (2006) adopted a principal component analysis to determine the motivators for Taiwanese students to study higher education in Australia. It was determined that individual beliefs about overseas study and students‘ perceptions about the outcomes of that study were the factors that most shaped Taiwanese student intentions (Chen and Zimitat, 2006). In this study, the Theory of Planned Behaviour is being adopted in an attempt to understand its applicability in the decisions that Indonesian students make in the choice of tertiary education. The Theory of Planned Behaviour (TPB) Prior to TPB, the Theory of Reasoned Action (TRA) was developed by Ajzen and Fishbein to explain the discrepancy between attitude and voluntary behaviour. However, since behaviour is not always voluntary and controlled, Perceived Behavioural Control was added to form the Theory of Planned Behaviour (TPB). The Theory of Planned Behaviour predicts deliberate behaviour, since behaviour can be deliberative and planned (University Twente, 2010). According to Ajzen, the best predictor of behaviour is intention. Intention is the cognitive representation of a person's readiness to perform a given behaviour and is held to be the immediate antecedent of behaviour (Ajzen, 1991). 504 Ajzen holds that a person‘s intention is seen to be determined by three elements:- 1. Attitude toward the behaviour (AB) – the positive or negative feelings that an individual has towards completing behaviour. 2. Subjective norms (SN) – the social pressures arising from how people they care about will view the behaviour in question 3. Perceived behavioural control (PC) – one‘s perceptions of their ability to perform a given behaviour, given the behaviour‘s perceived ease or difficulty. FIGURE 1: THE RELATIONSHIP OF COMPONENTS IN THE THEORY OF PLANNED BEHAVIOUR (TPB) Source: (Kalafatis, S.P., Pollard, M. and East, R.,1999) Thus according to Ajzen‘s Theory of Planned Behaviour, the stronger the attitude of a given student to study in Australia, the greater the approval of others, and the greater that student‘s own perceived capacity to undertake overseas study, the more likely will be that student‘s ultimate accomplishment of study in Australia. Indonesian People (ethnic) Groups Indonesia is an archipelago of several thousand islands and many distinct people groups. This research therefore seeks not to assume Indonesia as one whole. Ethnographic research of three diverse Indonesian people groups – two pribumi (ethnic Indonesians) and one ethnic Chinese is to be undertaken. These groups are distinctly different and will allow a valuable comparison to be made as to how education is and can be marketed. 505 The Sundanese are one pribumi Indonesian ethnic group with a distinct culture and a language spoken by approximately 27 million Indonesians (Taylor, 2003). Pribumi here is the Indonesian term used to distinguish the longstanding ―original‖ inhabitants of Indonesia to the relatively recent arrivals such as the ethnic Chinese. The Sundanese occupy the western one-third of the island of Java and are second in number to the dominant Javanese (Hefner, 1997). Most Sudanese are farmers with small land holdings. The Sundanese tend to be reluctant participants in both government and military, with comparatively few Sundanese moving far from their birthplace. The Balinese, with a 2009 population of 3,551,000, are perhaps the most well know Indonesian people group to Australians. The Balinese are 93% Hindu and are renowned for their highly developed arts, including painting, sculpture, leather, metalworking, dance and music (Statistics Indonesia, 2010). As a result of migration over several centuries, a separate and very distinct ethnic group in Indonesia is the Chinese. Whilst many Chinese Indonesians are Han in origin from southern China, most are diverse in their ties to China and in the timing and circumstances of their migration to Indonesia. Chinese migrants to Indonesia came predominantly as traders or labourers. The Dutch colonial policies of Indonesia hindered the Chinese from acquiring land. Yet despite favorable conditions being given to pribumi Indonesians, Indonesians of Chinese descent have dominated in entrepreneurial business activities. Today most Chinese Indonesians live in the major cities and control the bulk of Indonesian commerce. West Kalimantan is the only region with a significant population of Chinese farmers (Dana, 1999, 2001). Race relations between ethnic Chinese and indigenous Indonesians have long been problematic. Some researchers believe that this is a product of the Dutch colonial era where policy favored the Chinese and thus enabled their economic dominance over Indonesia. METHODOLOGY 506 Johnson and Onwuegbuzie (2004) argue for a mixed research method moving beyond the quantitative versus qualitative research divide to a position where both quantitative and qualitative research are important and useful. This research has commenced with semi in-depth interviews which will be followed by quantitative research through a structured questionnaire of Indonesian students. For the purposes of this preliminary analysis, seven in-depth interviews were undertaken in early 2010 with Indonesian students who desired to enroll in an Australian tertiary educational facility but who, to-date, had not done so. Each interview lasted approximately 45 minutes. KEY PRELIMINARY FINDINGS Seven major questions were asked in the semi in-depth interviews. A summary of responses is presented below. Question 1: Would you like to study in Australia at any time in the future? All students interviewed indicated a strong desire to study in Australia should the opportunity be presented to them. After Australia, the United States was identified as the next most desired destination country. There was an identifiable link between studying overseas and the learning of English. Students who perceived that they had performed well in their English study, wanted the opportunity to further advance their English skills. These students stated that they also wanted to learn more about western culture. It was expressed that it was obvious that Indonesians would want to study in Australia because of the perceived benefits that such opportunity brings (see Question 3). Question 2: What would prevent you from possible study in Australia? The most common reason why study may not be possible was financial. Students identified the cost of overseas study to be expensive and thus out of bounds for most 507 Indonesians to be able to consider. Another significant reason identified was the difficulty in gaining permission from family members. It was believed that because of strong familial ties, some parents would be reluctant to allow their children to study overseas. Other problems identified included a lack of knowledge of how to go about the process; and the fear of being in an unknown environment. Adaptation to a new language and culture was not identified as major concerns. Question 3: What do you see as the benefits of studying in Australia? Key reasons given by students included that they could learn English much faster than would otherwise be possible in Indonesia. Students identified that, like it or not, they would have to speak English if they lived in Australia! They saw that living in Indonesia meant that they could too easily avoid having to speak English. The challenges of understanding the differences in culture between Indonesia and Australia was identified as a positive benefit. Students also believed that they would be far more academically advanced by studying in Australia as compared to undertaking similar study at home. It was believed that work opportunities on return to Indonesia would be greater because of the experience of overseas study. The possible opportunity to later work in Australia was also identified as a strong ―pull‖ factor. Question 4: What/who are the influences that have encouraged you to study in Australia? Family members and friends were strong influences. Family and friends who had already been overseas were identified as the strongest influence in a decision to study in Australia. These people did not necessarily have to have been to Australia. However, having friends or family already in Australia was a significant ―pull‖ factor. Students who had jobs involving the use of the English language, who seen to be more likely to desire to be more proficient in English and more likely to want to know more about the people who speak English. Question 5: What preparations are you taking, or have you taken in the past to prepare you for study Australia? 508 All students interested in studying overseas had undertaken at least some preparation. This preparation however was not always extra-curricular. The most common preparation was additional English language study. All students had undertaken English language study during secondary schooling. Some had supplemented this with formal post- secondary courses. The cost of extra-curricular language study was a major obstacle. Question 6: What is your opinion of the quality of Australian education? There was a strong feeling that the quality of education in Australia was superior to that offered in Indonesia. Textbooks were considered to be better, the style of learning better and the motivation of students studying in Australia were deemed to be higher than those who were undertaking university study in Indonesia. Australian students were considered to be more disciplined. Indonesian students were considered to have a poor attitude in class, be poor in submitting completed work and to be less punctual than Australian students. Indonesian culture was said to be a significant reason for this. Indonesia was said to be less organised and more chaotic. Therefore, it was assumed that the education system would be better in Australia because Australia was believed to be a more organised country. Question 7: How much do you think it costs to study in Australia? Most students identified costs in terms of annual costs. Those who did not identify costs in rupiah were more likely to identify costs in US dollars, not Australian dollars. The surprising outcome was that the majority of students had little idea of how much it would actually cost to study in Australia. Students tended to believe that the cost of study in Australia was far greater than what it would reasonably be expected to cost. Students found it difficult to give a reasonable estimate of the cost of tuition and the cost of living in Australia. FUTURE RESEARCH Several key issues emerged from the interviews that need follow up. Descriptive and statistical tools of factor analysis and multiple regression will later be employed to analyse the quantitative data that will be collected. Analysis will be based on Chen and Zimitat‘s theoretical framework (2006) together with Ajzen‘s Theory of Planned Behaviour (TPB). 509 Research will seek to explore the interaction of Ajzen‘s factors of Attitude, Subjective Norms and Perceived Controls when Indonesian students consider study in Australia. Thus the attitude of students, the referent beliefs of significant others, and the student‘s perceived ability to undertake overseas study will be explored, in understanding a student‘s ultimate accomplishment of study in Australia. Additional Areas of Research Outside this Study Education has also long been a significant form of international aid. Much of Australia‘s current international aid is channeled through the Australian Agency for International Development, AusAID (AusAID, 2010). Australia‘s investment in Indonesia is considerable. In monetary terms, the total value of Australia‘s Official Development Assistance (ODA) to Indonesia in 2009-10 is approximately $452.5 million (AusAID). Australian educational assistance to Indonesia commenced in the 1950’s with scholarships funded through the Colombo Plan. The Colombo Plan was an initiative bringing together Asian and Western countries during a period of considerable political and economic uncertainty (DFAT, 2010). The Plan was based on the belief that improved living standards would foster political stability and prove a counter to communism in the region (DFAT, 2010). Whilst the Colombo Plan has now been disbanded, several of its aims have remained and are apparent in Australia’s current international aid initiatives. The long-term goal of Australia's current aid program to Indonesia is ―to assist Indonesia to reduce poverty and achieve sustainable development‖ (AusAID, 2010). Education is considered to be ―the most basic building block of development and a vital contributing factor to the alleviation of poverty‖ (AusAID, 2010). Dick adds weight to the ongoing significance of Australia‘s aid program to Indonesia in stating, ―Indonesia is Australia‘s leading aid recipient and its eleventh biggest export market‖. ―Aid is perhaps the clearest Australian commitment to the long term relationship with Indonesia‖ (Dick, 2009). Bearing in mind then the breadth and significance of Australia‘s educational aid to Indonesia, AusAID has identified a pressing need for more research to be carried out (AusAID, 2006). The Australian (aid) program has had considerable range, in terms of scope, coverage, budget and implementation approach …empirical research should inform initial investment and ongoing management. Without a robust results-based performance monitoring and evaluation system, the impact of investment is uncertain. 510 Significant further research is therefore possible in this area. In particular, the possible conflict between Australia driving education export earnings, and, education as international aid, could be explored. CONCLUSIONS This paper has begun the process of exploring Indonesian perspectives concerning higher education study in Australia. Several factors have emerged from the semi-in-depth interviews. It has been found that a strong desire exists among Indonesian students to want to pursue study in Australia. This desire has been seen to be driven by several influencing factors, but especially close family members and friends. There were several perceived benefits of studying in Australia; principally being to improve English proficiency and to increase the likelihood of future well-paid and rewarding employment. However several factors also exist which often prevent these intentions from being realised. Further research is to be undertaken to develop these salient motivating factors. In addition, it is hoped that this research will improve the marketing of education in order to benefit both overseas students studying in Australia and Australian educational providers. It is further hoped that future research will support the importance of developing strong long-term relationships between Australia and Indonesia. 511 REFERENCES Australian Bureau of Statistics http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf accessed 10 July, 2009 Australian Education International (AEI) (2003), The economic benefits to Australia from international education. Canberra: Australian Education International, AGPS. Australian Education International (AEI) (2010), http://www.aei.gov.au AusAID (2006), Indonesia Education Program Strategy 2007-2012 AusAID (2010), http://www.ausaid.gov.au Ajzen, I. 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(1998), Open Doors 1997/98 – Report on International Education Exchange, New York, Institute of International Education DOFA, The Department of Foreign Affairs (2005), The Colombo Plan, Canberra DFAT, The Department of Foreign Affairs and Trade (2010), http://www.dfat.gov.au DETYA, The Department of Education, Training and Youth Affairs (1997), Overseas Student Statistics, 1996, AGPS, Canberra Dick, H. (2009), ―Indonesia: The Past is Past‖, The Asia link Essays, May 2009, No. 2, Retrieved November 19, 2009, from http://www.asialink.unimelb.edu.au/publications/the_asialink_essays Gatfield, T. (1997), International Marketing of Australian Higher Education to Asia: A Comparative Study of Australian and Asian Student Perceptions of Quality and its Implications for the Praxis of Educators, Policy Makers and Marketing Practitioners, Griffith University Press, Brisbane Gillard, J. 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(2003), Indonesia: Peoples and Histories, New Haven and London: Yale University Press Terry, D.J., Hogg, M.A. and White, K.M., (1999), ―The theory of planned behaviour: self- identity, social identity and group norms‖, Br. Journal Social Psychology, 38:3, pp. 225–244. UNDP (2005), Human Development Report, United Nations Development Programme, United Nations, Washington, DC. The World Bank, Annual Report, Washington, DC. University of Twente, ―Theory of Planned Behavior/Reasoned Action‖, Retrieved January 2, 2010 from http://www.tcw.utwente.nl/theorieenoverzicht/Theory%20clusters/Health%20Commu nication/theory_planned_behavior.doc/ Yao, L. J., Bai Y. (2008), ―The sustainability of economic and cultural impacts of international students to regional Australia‖, Humanomics, Vol. 24, No. 4, pp. 250– 262. 515 BUSINESS STRATEGIES ADAPTED FOR SOCIAL BENEFITS AMDIST THE ECONOMIC CRISIS Julie B. Johnson University of Western Australia, Manila Campus 25C Rizal Tower, Rockwell Makati City, The Philippines 1210 Phone/Fax: +1 512 382-0691 Mobile: +63 921 846 8037
[email protected] ABSTRACT Research and practice has shown that using business strategies in the nonprofit sector can be beneficial when such tools are given the flexibility to be used in the context of a philanthropic organization. A strategic analysis was conducted on the nonprofit, Makarios International, in the fourth quarter of 2008 which studied the group’s priorities, identified strengths and weaknesses and made recommendations based on best practices of a strategic enterprise. This analysis is now used as the baseline to compare and contrast the plans of the group as outlined during the 2008 study to the actual developments throughout 2009. BENEVOLENCE WITH THE STROKE OF EFFICIENCY The Problem: Need for Strategic Transformation Most accountability standards in the nonprofit sector are designed to address only short-term issues, and long-term or strategic choices are not usually given precedence in the decision- making process (Teegen, Doh and Vachani, 2004). Research has shown that by 2001 most privately funded, nonprofit organizations had no outcomes assessments (e.g. an increase in the rate of adult literacy) but measured only the data from ongoing programs (e.g. the number of participants or established locations) (Morely, 2001 in Leviner, Crutchfield and Wells, 2007). As recently as 2009, these accountability concerns had not been alleviated (Golden, Longhofer & Winchester, 2009). Roberts and Woods (2005, p.45) identify many nonprofit organizations as ―short on theory and definition but high on motivation and passion,‖ however, globalization is pressuring them to make fundamental changes towards stronger accountability (Brown et al, 2000). In addition to this pressure from external sources, the recent economic crisis has threatened the stability of for-profit and nonprofit entities alike. Alongside economic hardship or strain comes stronger reliance upon nonprofit services (Golden, Longhofer & Winchester, 2009). As more services are being demanded, research reveals that a decline in funding is likely to take place during a recession. In the United States recession from 1973-1975, the decline in donor giving was a dramatic 9.2 percent (adjusted for inflation)—in 1974 alone it decreased by 5.4 percent (Anon, 2008). 516 Given the nature of a philanthropic organization—largely dependent upon donations while seeking social transformation that rarely takes place quickly—the need for a long term perspective is intensified. Strategic transformation is essential to address existing accountability concerns as well as withstand evolving economic situations. The purpose of developing strategy is to build a bridge between an entity and the industry in which it is conducting activity (Grant, 2008). To make this connection, many strategic business principles could be applied to the nonprofit or public sector, but often a conversion must take place of what is being measured and/or how it is being measured for these principles to be effectively implemented. A philanthropic organization will have different motivations, methods and metrics for measuring success as compared to a for-profit business. Goals for social transformation in the areas of human rights, poverty or the environment cannot necessarily be measured by the exact tools of a business that is focused on the profitability of a tangible product or service. In order to transform the strategy away from the short-term, non-governmental organizations (NGOs) are turning to the business world for ideas. The Answer: Social Entrepreneurs and Best Practices One aspect of the business world often adopted and adapted by the nonprofit sector is that of entrepreneurship. An entrepreneur is one ―who discovers, evaluates and exploits profitable opportunities, taking into account risk, alertness to opportunity and the need for innovation‖ (Shane, 2003, in Roberts and Woods, 2005, p46). Some individuals now approach social problems with a for-profit mindset and have created the ―social entrepreneurship‖ movement (Mair and Schoen, 2005). Social entrepreneurs combine the social goals and values of a nonprofit with the perspective of a for-profit in order to address social problems around the world (Roberts and Woods, 2005). Private sector frameworks are being modified to enable philanthropic organizations to more effectively achieve their goals by integrating ―efficiency with humanity and decency‖ (Lindenberg, 2001, p268). In addition to entrepreneurship, several other elements have been identified that are thought to be significant factors present in a strategic nonprofit organization. In a study of three nonprofits considered ―successful‖, Mair and Schoen (2005) pinpointed the following activities consistent among the organizations in spite of the divergent missions and activities of the three groups: 1. Partnering with companies that have shared values; 2. Building upon existing resources; 3. Strategic disbursement of resources; and 4. Integrating program recipients into the value chain. Given the perspective of entrepreneurship and the best practices discussed above—tactics involving marketing, partnerships, resource development and recipient involvement— business principles can be modified and successfully implemented in a not-for-profit setting. By using private sector benchmarking techniques and models, a philanthropic organization has the ability to not only improve the quality but also further the impact of its programs (Lindenberg, 2001). 517 OVERVIEW OF THE 2008 STUDY The Case Study: Makarios International Given the shift in the business world in recent years (from a market focus to a customer focus) to add more value rather than simply deliver a product to a customer, business principles have become easier to apply to philanthropic organizations (Ngo and O‘Cass, 2008). In order to test the adaptability of certain business tools to a nonprofit organization, a strategic analysis was conducted on Makarios International. This study took place in the fourth quarter of 2008—during which many economic indicators showed a bleak state of affairs. Makarios is a not-for-profit organization that focuses on educational development in the Dominican Republic, Haiti, and other less-developed areas around the globe. The group has offices in the Dominican Republic, where the bulk of programs exist, and in the United States where most of the funding originates. Makarios differentiates itself by providing a holistic approach to education as it addresses the physical, spiritual and emotional needs of children in addition to teaching skills for life (Megilligan, 2008a). The organization was founded in 2004, and as of 2008 employed 20 staff members and managed approximately 250 volunteers in the course of the year. Elements and Conclusions of the Strategic Analysis The purpose of the strategic analysis in 2008 was to apply business practicality in a nonprofit setting and determine where principles overlap and where they diverge. After establishing several best practices for nonprofit organizations, measurements were then identified from within the business world that enabled a more scientific study of the organization. Typical strategic analysis tools were applied to Makarios, and the categories studied in 2008 can be divided into six primary areas: 1. Background information—identification and assessment of the contribution of stakeholders, the mission, vision, values and strategic objectives; 2. The external environment—an examination of the political, economic, social and technological (PEST) factors as well as an industry value chain analysis; 3. The internal environment—internal value chain analysis and the evaluation of strategic resources; 4. Conducting a competitive advantage valuation; 5. Analyzing the strategic posture for the upcoming year; and 6. Categorizing the expansion choices—primarily diversification (through forward and backward alignment in the value chain) and market penetration. Given the extensive amount of sound business tools that were employed, it is evident that Makarios International truly is a social entrepreneurial endeavor, and that many business methods are highly convertible and/or useful for philanthropic organizations in achieving their goals. The analysis pinpointed the strengths of Makarios as well as the implementation of best practices. Areas that needed improvement were listed as well, and were mostly related to communication issues and tracking the development of the strategic goals. See 518 Appendices A, B and C for the full review of strengths and weaknesses, best practices and recommendations identified in this study. PLANNING MEETS REALITY 2009 Strategic Objectives Using the objectives outlined in the 2008 study as a baseline to compare and contrast the actual developments of 2009 enables an assessment of how well the organization was achieving its stated mission that ―Makarios is dedicated to educational development in the Dominican Republic, Haiti, and other impoverished areas of the world. We are committed to a child's spiritual, physical, emotional, and intellectual growth, to provide hope for a better future.‖ If the mission is used as the overarching framework for making strategic choices, then the level to which those strategic objectives are achieved is a good measure of the success of an organization (Hirschberg, 2008). At the end of 2008, the three main focal points outlined for 2009 were as follows: 1. Develop partnerships with other international NGOs; 2. Develop the farm as a source of food and revenue; and 3. Expand the existing school (Megilligan, 2008b). With these three goals in mind and the extent of the economic fallout yet to be fully realized, Makarios braced for the impact, but moved forward with caution and determination. While the recent economic crisis may have challenged and even broken many for-profit and not-for- profit entities, the crisis revealed the stability of Makarios. In an interview, the director indicated that ―we are not going to be the best example of how the economy affected nonprofits because we have been fine‖ (Megilligan, 2010). Although things did not always progress exactly as expected, not only were the primary objectives achieved but additional progress was made to strengthen areas that needed focus and attention. International Partnerships The first objective was to partner with international non-governmental organizations. Such alliances are becoming more possible due to technological advances (primarily the internet) and more popular due to the need to address world-wide issues by combining the learnings and problem-solving skills from different perspectives and backgrounds (Brown et al, 2000). Such efforts focused on working with groups that already existed in particular areas, rather than establish a new, physical presence of Makarios. This goal was met on several fronts not only locally in the Dominican Republic but also abroad in countries such as Haiti, Pakistan and Sudan. Locally, Makarios partnered with groups on projects such as water purification and adult literacy. These partnerships focused on establishing relationships with local branches of large, international organizations or smaller, more nimble groups to avoid bureaucratic issues that often accompany larger groups (Megilligan, 2010). One of the partnerships established in the last few of months of 2009 involved a photographer. The photographer is a champion of social justice, and uses her skills and 519 talents to raise awareness and help alleviate social ills around the world. Her work does not stop with simply taking photographs to tell the story or situation that exists, but rather, she connects the subjects of her photographs to the resources necessary to address their needs. Makarios was able to support this photographer and other groups that had a physical presence in Port-au-Prince, Haiti, but were struggling to obtain necessary supplies due to the devastation. Makarios utilized its strong network and raised tens of thousands of US dollars within days of the earthquake. As a result of the relief work, an unexpected source of donations materialized—new people were introduced to the work of Makarios through forwarded emails and postings on blogs relaying their relief efforts. This exposure created new supporters for the mission of Makarios unrelated to the specific fundraising for the Haitian relief efforts (Megilligan, 2010). In Pakistan, talks with potential partners have continued for the last two years, but Makarios representatives have been unable to visit due to the political unrest. Instead, they are supporting a Pakistani group by helping to coordinate fundraising events for 2010 when representatives from Pakistan will be in the United States (Megilligan, 2010). In Sudan, Makarios began a partnership with a group that was starting educational programs in a remote area but had little experience in establishing formal schools. Makarios began consulting with them on a regular basis to provide organizational structure and resource requirements (e.g. teacher training and acquisition of materials). Educational programs are now being provided to four remote villages in southern Sudan (Makarios, n.d.). Makarios is also partnering with the group for child sponsorships—Makarios provides the fundraising through its network of supporters for the Sudanese children from these villages. In return, the Sudanese group provides regular updates to the financial sponsors, a key component of providing non-material benefits to Makarios‘ stakeholders. Makarios will continue to provide consulting services, ongoing financial support and facilitating volunteers to help with construction during the dry season (Megilligan, 2010). It is clear that Makarios successfully achieved the first objective of international partnering in spite of the uncertain economic times. The strength of its mission, identifying and working with like-minded individuals (e.g. the photographer) and entities (e.g. groups in the various countries) and the ability to leverage such a committed group of stakeholders are all examples of best practices being implemented across the organization to successfully achieve a goal. Development of the Farm The objective for the farm was to further develop it as a source of revenue and food. Efforts were focused on finding an onsite leader to teach sustainable and vocational farming, however, the position had not been filled by mid-year. After much exploration and consideration of individuals to fulfill the role, Makarios determined that offering in-house vocational training at this time needed to be re-assessed. The farm was still a good program with much potential, but was outside the scope of the educational efforts which primarily focused on younger children. Another local entity expressed interest in buying the land to continue the farming as well as add vocational training for ironworks and woodworking skills, so Makarios took the offer and the farm was sold (Megilligan, 2010). 520 Although this was a shift in the initial strategy for the farm, the money was redirected to support the expansion of the pre-school, the third major objective. Makarios remains involved with the running of the farm and continues to do outreach programs to children in the area. Additionally, in years to come Makarios will have high school graduates that will be in need of vocational training, and this working relationship will provide a natural and viable option for those students to pursue (Megilligan, 2010). Preschool Expansion For the preschool, the annual goal was to add the classroom resources to accommodate one grade higher to grow with the existing students as well as adding a new group of three-year- olds. In 2009, a second building was constructed (partially with funds from the sale of the aforementioned farm) which has two new classrooms and the capacity for future additions. Makarios determined that it is more beneficial to start teaching children as young as possible and grow with their educational needs. Outreach now focuses on children at the age levels for which the school has existing classes and teachers (preschool and kindergarten). For the older children already attending programs implemented before the school was built in 2007, they continue to attend after school programs. A social work structure is setup to support these older children to ensure that they are attending the local public school by alleviating any financial hindrances that arise for these impoverished families (Megilligan, 2010). Developments took place in the staffing arena as well. A new teacher came with the advent of the new grade and two additional teachers‘ aides joined the school. A sponsorship coordinator also joined the administrative staff. Many of the educational programs of Makarios are paid for through individual sponsorships. When the sponsorship program coordinator was added last year, this increased the stability and consistency of donations from sponsors by closing the monthly gap of approximately 15% of monthly commitments that were not being received. Sponsors in return now receive monthly updates on the children they are financially supporting rather than only once per semester. The streamlining of the sponsorship program has not only filled the financial gap that previously existed, but will also facilitate the hiring of three new employees for the school in 2010 (Megilligan, 2010). Beyond the Primary Objectives but Supporting the Organization There are numerous examples of the entrepreneurial spirit of this organization, but one particularly interesting example of sustainable revenue was established by leveraging the group‘s network. Two financial supporters of Makarios in coordination with the Executive Director established a coffee shop—Dominican Joe—in 2006 in the United States. This for- profit business (and fully separate entity) has become a steady revenue stream for Makarios, the primary coffee supplier to Dominican Joe. The coffee is sourced from a farm in the Dominican Republic via Makarios, and both the coffee farm and Dominican Joe are aligned with the values of Makarios. Additionally, the coffee can be purchased through the Makarios web site. 521 The revenue stream from the Dominican Joe coffee shop grew even through the economic downturn. The coffee shop has had an average growth of 3-5% each month since its inception over three years ago. This revenue stream accounts for approximately 10% of Makarios‘ annual budget, and even with the growth of the overall budget last year, this revenue source was maintained because the income grew as well (Megilligan, 2010). Throughout 2009, Makarios also took the opportunity to address internal issues (see Appendix B for list of weaknesses as identified in the 2008 study). Generally, the issues related to tracking the developments of the organization‘s vision and effectively communicating those changes to various stakeholders (employees, volunteers, partners, sponsors, general donors, etc.). To address some aspects of this situation, a business consultant who is also a member of the Makarios network agreed to spend a month in the Dominican Republic interviewing staff, assessing the organization and using his business expertise to objectively identify areas that could be strengthened. Particular attention was given to board governance and communication. According to the Executive Director, concentrating on the developments and communications flowing from the Board to all other stakeholders ―has been one of the most important things Makarios has done in the last year and a half‖ (Megilligan, 2010). The consultant, in coordination with the Executive Director, adapted a for-profit Board self- assessment in order to make it more applicable to the nonprofit setting. From this exercise, communication to current and potential donors and partners has drastically improved. A new logo was finalized early in 2009, and documents beyond a brochure, annual report and the web site were subsequently developed (Megilligan, 2010). Many discussions also took place to unify the staff regarding the goals and their implementation. Internal marketing efforts such as these are sound business practices and well-developed, long-term relationships with stakeholders—known as relationship marketing—are particularly effective for nonprofits (Arnett, German and Hunt, 2003). Further, research suggests that it is more beneficial to expend resources towards developing stronger ties with existing stakeholders rather than simply focusing on attracting new ones (MacMillan et al, 2005). While the minutes from the board meetings reflected the developments of the organization, they were not in a transferable format to anyone requesting the information—internally or externally. Although the mission, vision and strategic goals were outlined for staff and volunteers at their initial orientation to Makarios, little, if any, follow up was conducted to convey changes as they inevitably occurred. Now, a five-year plan that clearly and effectively outlines such developments exists, and this will act as a baseline for tracking Makarios‘ progress. Other internal communications documents are in the final stages of completion before being distributed to staff (Megilligan, 2010). CONCLUSIONS In evaluating the plans of Makarios for 2009 and the actual developments of such an unpredictable year, Makarios clearly accomplished its objectives. Although there were specific areas in which a low-level impact was felt due to modified behavior of individuals, the negative effects were marginalized because of the broad spectrum of support. Specifically, there was a slight decrease in the amount per patron spent at the Dominican Joe 522 coffee shop, but growth in the total number of patrons counteracted this shift. Second, the volunteer groups going from the U.S. for short-term programs decreased from 18 in 2008 to 16 in 2009. This impacted Makarios financially in that these volunteer groups generate additional revenue because often people returning from the trip become sponsors of individual children or regular donors to the organization as a whole. With two fewer groups in attendance, there was a slight reduction in the revenue that they generated. Third, in the first nine months of the year, the general donors were slightly lower than the previous year, and forced the group to access reserve funds. However, the months of October, November and December more than made up the difference as end-of-year giving was unusually strong. This lucrative quarter was followed by the Haitian earthquake in which new financial supporters were established as a result of Makarios‘ relief efforts (Megilligan, 2010). Overall, Makarios International is an example of how a solid organization fared well in spite of much economic uncertainty. Not only were the primary objectives for the year met, but sustainable revenue streams remained intact and time and attention was given to areas in need of improvement. For Makarios to continue building a strong network of capabilities it must continue to effectively coordinate its various resources (Grant, 1991). In a business setting, the use of these strategic resources would determine the company‘s capacity to compete (Hirschberg, 2008). In a nonprofit setting, the use of resources determines the organization‘s ability to execute the chosen strategies, thereby addressing their social mission. 523 REFERENCES Anon (2008). ―Briefing on the Economy and Charitable Giving‖, Spotlights (fall), The Center on Philanthropy at Indiana University, Arnett, D. B., German, S. D. & Hunt, S. D. (2003). ―The Identity Salience Model of Relationship Marketing Success: The Case of Nonprofit Marketing‖, Journal of Marketing, 67, 89-105. Brown, L.D., Khagram, S., Moore, M.H. & Frumkin, P. (2000). ―Globalization, NGOs and Multi-Sectoral Relations‖, Working Paper #1, Hauser Center for Nonprofit Organizations and the Kennedy School of Government, Harvard University. Golden, S., Longhofer, W. & Winchester, D. (2009). Nonprofits in Need, Contexts, University of California Press, 8(3), 14–15. Grant, R. M. (1991). ―The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation", California Management Review, 114-135. Grant, R. M. (2008). Contemporary Strategy Analysis, Malden, MA: Blackwell. Hirschberg, P. (2008). Strategic Management-Internal Analysis, Lecture delivered for MGMT 8700 on September 25, 26, 27, 2008 at the University of Western Australia, Manila campus. Leviner, N., Crutchfield, L.R. & Wells, D. (2007). ―Understanding the Impact of Social Entrepreneurs: Ashoka's Answer to the Challenge of Measuring Effectiveness‖, Research on Social Entrepreneurship: Understanding and Contributing to an Emerging Field, 89-103. Lindenberg, M. (2001). ―Are We at the Cutting Edge or the Blunt Edge?: Improving NGO Organizational Performance with Private and Public Sector Strategic Management Frameworks‖, Nonprofit Management & Leadership, 11, 247-270. MacMillan, K., Money, K., Money, A. & Downing, S. (2005). ―Relationship Marketing in the Not-For-Profit Sector: An Extension and Application of the Commitment-Trust Theory‖, Journal of Business Research, 58, 806-818. Mair, J. & Schoen, O. (2005). ―Social Entrepreneurial Business Models: An Exploratory Study‖, Working Paper No. 610. IESE Business School, University of Navarra. Makarios Web Site, http://makariosinternational.org/sudan/. Megilligan, S. (2008a). Overview of Makarios [Interview by Julie Johnson] Texas, October 13, 2008. Megilligan, S. (2008b). Overview of Makarios [Interview by Julie Johnson] Texas, November, 10, 2008. 524 Megilligan, S. (2010). Review of Makarios [Phone Interview by Julie Johnson], April 3, 2010. Ngo, L.V. & O‘Cass, A. (2008). ―Creating Value Offerings Via Operant Resource-Based Capabilities‖, Industrial Marketing Management, 1-15. Roberts, D. & Woods, C. (2005). ―Changing the World on a Shoestring: The Concept of Social Entrepreneurship‖, University of Auckland Business Review, 45-51. Teegen, H., Doh, J.P. & Vachani, S. (2004). ―The Importance of Non-Governmental Organizations (NGOs) in Global Governance and Value Creation: An International Business Research Agenda‖, Journal of International Business Studies, 35, 463-483. 525 APPENDIX A. Best Practices and Strengths of Makarios International—2008 Strategic Analysis Stakeholders Makarios has won the loyalty of many stakeholders as is indicated by the strong, positive image that facilitates recruitment. The success of recruiting via informal channels such as word of mouth reveals loyalty and respect for the organization and those associated with it. Relationship marketing and non-material benefits are present, particularly through the sponsorship program for individual children. Non-material benefits are also strongly communicated and displayed to patrons of the Dominican Joe coffee shop. Mission The mission statement is well developed by giving long-term direction and stability as well as explaining why the organization exists. Values The values have been carefully developed and are clearly outlined. The primary list includes personal responsibility, stewardship, dignity, compassion, integrity, cultural sensitivity, relationship- driven and sustainability. Strategic Objectives The priorities are well defined—the critical few rather than the important many (the top three are developing partnerships with international NGOs, expanding the school and developing the farmland). External Analysis Value is being added through building upon existing resources such as the partnership with Dominican Joe being established through stakeholders; nonmaterial benefits are displayed at the coffeehouse (e.g. opportunities to be further involved in Makarios programs by donating items such as cell phones to be used in the Dominican Republic); and recipients of the school programs are incorporated back into the value chain through the school/education programs and the farmland. Internal Resource Analysis Physical The existing land and building resources are well managed and being further developed. External Non-Material A very positive public image exists, stakeholder resources are being leveraged to build partnerships with like-valued companies and a very loyal constituency with many of the stakeholders has been established. Individual HR The Executive Director is a strong social entrepreneur, stakeholders (founders of Dominican Joe, in particular) have resources and business experience they are willing to invest in supporting Makarios via Dominican Joe. Collective HR The culture of the organization has consistent values throughout and has a strong ability to recruit new stakeholders. Competitive Analysis Makarios is successfully adding value through differentiation with a holistic approach in addressing educational needs, by providing a variety of levels of involvement and incorporating participants in the programs/recipients of social benefits back into the Makarios value chain. 526 B. Identified Weaknesses in Makarios International Values Too many values are emphasized to effectively be used as a test or point of reference in decision-making. Vision Vision is not specified in a succinct manner for stakeholders nor is there one document that tracks how the vision is being implemented or how it is evolving. Strategic Objectives Although three objectives for the next two to three years are identified by staff, no quantifiable actions or milestones seem to be associated with the objectives to measure successful completion. Internal Resources External Non-Material Marketing materials are lacking—relationship marketing with general donors is underdeveloped and few non-material benefits are made known to them. Collective HR Little formal training exists to familiarize new employees and volunteers with the background (i.e. the stakeholders, mission, vision, values and strategic objectives) of Makarios. C. Recommendations Resulting from the 2008 Strategic Analysis 1. VALUES—Due to the large number of values cited, it could be beneficial for Makarios to develop a more concise or prioritized list which will maintain consistency among stakeholders regardless of how much growth is experienced in the future (Collins and Porras, 1996). 2. VISION—Develop a vision statement that expounds on the mission statement but is not as detailed as the three Strategic Objectives—often it can be helpful to use sensory clues to describe the desired future state that will indicate how the future will look, sound, feel, etc. This will also help establish a baseline to document changes to or implementation of the vision (Hirschberg, 2008). 3. STRATEGIC OBJECTIVES—It is problematic to take a balanced scorecard from the business world and apply it directly to Makarios International, but adaptations can be made in order to apply the framework in a productive manner (Keyt, 2001). Developing a balanced scorecard could be a valuable exercise for the Makarios Board of Directors to undertake as an internal management tool to enable precise identification of existing resources. Subsequently, this exercise would determine/confirm if the current three strategic objectives are the best expenditures of the available resources (Clark, 2003 in Leviner, Crutchfield and Wells, 2007). Further, a balanced scorecard enables leaders to transform the identified objectives into quantifiable actions that can be measured (Kaplan and Norton, 199e in Keyt, 2001). As Keyt (2001) describes, an organization must continually answer the question of how the mission and vision are being implemented, and the best way to monitor this is through goals that are SMART (Specific, Measureable, Actionable, Realistic and Time-bound) or through some other measureable guidelines. 4. EXTERNAL NON-MATERIAL RESOURCES—Develop official logo and supplementary marketing materials. These materials could be used to explore CRM or other 527 partnerships. It has been shown beneficial for a nonprofit to approach potential partners from a public relations perspective rather than that of a community relations perspective. This enables potential (business) partners to quickly see what the partnership would involve from a business perspective (e.g. specific and measurable objectives, methods to monitor and evaluate a project and/or a proposal outlining the usage of funds) (Bennett, 2002). In developing CRM partnerships it is important to clearly demonstrate any linkage that can be made between the employees of the business entity and the mission of the nonprofit (Bennett, 2002). Additionally, once a partnership or CRM campaign has been agreed upon, establishing inter-organizational teams to manage the sharing of information is of particular importance to the success of the endeavor (Bennett, Mousley and Ali-Choudhury, 2008). Relationships with donors who sponsor individual children on a regular basis are well developed through updates regarding the child‘s progress; however, relationships with general donors are less developed. Partnerships, funding and/or resources are potentially foregone due to the weak nature of the relationship to general donors. Creating opportunities to foster participation and communicate achievements to the donors not associated with a specific activity/program would deepen the ties between Makarios and these stakeholders by promoting the non-material benefits to them. 5. COLLECTIVE HUMAN RESOURCES—Create training materials for all new employees and volunteers in order to ensure that new stakeholders learn about the mission, values, vision and strategic objectives. As the organization grows, it is vital to maintain consistency of the core foundation of the group in order to remain focused and coordinated in achieving the mission. ADDITIONAL REFERENCES FOR APPENDIX Bennett, R. (2002). ―Corporate Perspectives on Cause Related Marketing‖, Journal of Nonprofit & Public Sector Marketing, 10, 41-59. Bennett, R., Mousley, W. & Ali-Choudhury, R. (2008). ―Transfer of Marketing Knowledge Within Business-Nonprofit Collaborations‖, Journal of Nonprofit & Public Sector Marketing, 20, 37-70. Collins, J., and Porras, J. (1996). ―Building Your Company‘s Vision‖, Harvard Business Revew, 65-77). Keyt, J. C. (2001). ―Beyond Strategic Control: Applying the Balanced Scorecard to a Religious Organization‘, Journal of Nonprofit & Public Sector Marketing, 8, 91-102. 528 THE IMPACT OF INTERNET TECHNOLOGIES AND E-BUSINESS APPLICATIONS ON TOURISM ENTERPRISES: A CASE STUDY FROM CENTRAL VICTORIA, AUSTRALIA Michael Beacom La Trobe University, Bendigo, Australia Edwards Road, Bendigo, Victoria Phone: 61-3-5444-7319 Fax: 61-3-5444-7998
[email protected] Marthin Nanere La Trobe University, Bendigo, Australia Edwards Road, Bendigo, Victoria Phone: 61-3-5444- Fax: 61-3-5444-7998
[email protected] Abstract This paper seeks to understand the application, usage and impact of information and communication technologies (ICT) in leveraging e-commerce by small tourism businesses in the Goldfields region of Central Victoria. The region accounts for 13% of tourism related businesses in regional Victoria and in 2005, contributing $A545 million and 4,301 direct tourism jobs. Specifically, this paper aims to identify attitudes to the current global economic crisis and identify issues of connectivity, ICT skill development, customer and supplier electronic interaction, marketing and sales exploitation of ICT and ICT impacts, drivers and inhibitors. This paper is based on in-depth interviews with nine selected businesses based on local industry recommendations and a balance of tourism industry sectors from the ANZSIC classification. As well as gathering in-depth information the interviews served to trial a wider survey of the region. The resulting analysis is expected to provide direction to regional, state and national policy makers, educators as well as the tourism and ICT industries, both regionally and beyond. 529 Keywords: ICT, e-commerce, torism enterprises, regional Victoria.. 530 INTRODUCTION Tourism is fundamental to the world economy both financially and in terms of employment with many rural and regional areas, in developed and under-developed countries, heavily reliant on the industry (Pease, 2007). Increasingly, Information and Communication Technologies (ICT) are no longer an option but mandatory for business and, in particular, tourism businesses. The rapid growth in e-Commerce makes it an imperative for individual businesses as well as regions to leverage the technology if they are to remain competitive. ICT offers the ability to foster improved competitive performance through network, clustering and the formation of alliances as well as providing the richness of content increasingly required by consumers (Braun, 2008a). Beyond buying, the integration of the buying experience, for example, connecting the presentation of physical facilities, delivery processes, finance, etc., as well as a presentation that reaches customer segments in various new media mobiles, for example, iPods, Facebook, is increasingly required (Alvarez and Sugijoto, 2010). Whether ICT can bring business change depends on how people think about and apply it (Serge, 2002). A well developed tourist industry is characterised by consistency, safety, reliability, efficiency and value for money. In addition, appealing presentations of business products and travel destinations, ―sophisticated visualization of tourism products, the consulting role of travel agents, the social interaction and information exchange between travellers, as well as the information richness of the Internet‖ are key features for successful tourism e-Business (Berger et al., 2006). Improved competitive advantage can be achieved by tourism managers who embrace new information technology and actively participate in the technology planning process to identify new uses and manage their development (Moutinho, 2002). The internet revolution, rapid internationalisation of business and low cost airline travel, have impacted all business, especially tourism business, witnessing an increase from 682 to 880 million international arrivals between 2000 and 2009. Despite the slow down of 2008/099, international tourist arrivals are expected to grow of between 3% and 4% in 2010 according to UNWTO forecasts despite an economic environment where an estimated 12% drop in global exports has occurred (UNWTOa). For 2010, the UNWTO World Tourism Barometer believes prospects are close to the level of the boom years 2004-2007. Receipts for international tourism totalled US $733 billion in 2006 while it is generally understood that domestic tourism (holidaying within ones own country) is 4-5 times greater than international arrivals (UNWTOb). In Victoria, tourism directly contributes $8.6 billion directly and $7.2 billion indirectly to the states‘ economy, in total $15.8 billion, and accounts for 3.2% directly and overall 5.9% of Gross State Product (GSP), flowing through many businesses beyond tourism enterprises. Its true contribution is measured by the Gross Value Added (GVA) which contributes and additional $6.8 billion making Tourism worth an additional $14 billion in total or 5.8% of total Victorian GVA. Accommodation contributes the largest share (12.5%) to GVA with additional contributions from retail trade,(10.7%) air and water transport, (9.6%), education (9.4%), cafes, restaurants and food outlets (9.3%). For the year 2007 to 2008, the Tourism Industry provided employment for 184,800 people in Victoria (Tourism Victoria a). 531 The Goldfields region of Central Victoria, accounts for 13% of tourism related businesses in regional Victoria and the region has an 11% market share of all domestic visitors to regional Victoria. Of the visitor nights to the Goldfields region 69% were sourced from the intrastate market, 19% from interstate and 12% were from the international market. The tourism sector contributed $545 million to the Goldfields economy and generated 4,301 direct tourism jobs in 2005. While there has recently been some decline, (0.8% since 1999), the Goldfields region received approximately 33,200 international overnight visitors for the year ending December 2008, a decrease of 8.9% from 2007 to 2008. The region has an 11% market share of all international overnight visitors to regional Victoria (Tourism Victoria b). This paper focuses on small and medium tourism enterprises (SMTE), most of which are micro-businesses, in the Goldfields region of central Victoria and their adoption and usage of information and communication technologies (ICT), and in particular their use of the Internet. Following analysis of the data from both interviews and a forthcoming survey, we intend to identify the stages or level of development among Goldfields region businesses through the impact of ICT applications on the business, both externally and internally. In addition, the paper discusses the SMTE business operator‘s views on the usefulness of ICT and how they see further development. In summary then, the paper aims to: 1. Identify attitudes to the current global financial crisis, 2. Understand levels of connectivity, 3. Identify ICT skill development with businesses, 4. Identify the extent of customer and supplier electronic interaction, 5. Identify marketing and sales exploitation of ICT technology, and 6. Understand ICT impacts, drivers and inhibitors. The resulting analysis is expected to provide direction to regional, state and national policy makers, educators as well as the tourism and ICT industries, both regionally and beyond. We believe the technology will unfold rapidly in the years ahead and that the demand for tourism information, in particular from an emerging generation, brought up with the internet as the basic information tool, together with an increasing interest in visiting regional Victoria, will mean that the region that moves to leverage the technology, may have a decisive advantage over other Victorian regions and other destinations. Following the above introduction, we review relevant literature, discuss our methodology and our findings before drawing conclusions to our paper. LITERATURE REVIEW Research into the engagement of small to medium enterprises, including micro-businesses, (SME‘s) in the adoption of e-Commerce has been a continuing theme, both nationally and internationally. Since the European, Bangemann Report (1994) identified such engagement it has been seen as critical for an equitable into transition to the Information Age. The adoption of internet-based information and communications technology (ICT) by small and medium enterprises (SMEs) has been extensively researched around the world, (Beal, 2001; Fu et al., 2001; Vidgen et al., 2004; Alam et al., 2005; Kotelnikov, 2007; Balocco et al., 2009). Investments in ICT in tourism and hospitality have increased greatly in the past decade. (Cline and Warner, 1999; Sigala et al, 2000; Siguaw, 2000; Paraskevas and Buhalis, 2002). 532 The level of usage of ICT from basic technology - radio, fixed lines telephones and television - to more advanced technology – mobile phones, e-mail, e-commerce, and information processing systems, has been examined and explained. However, ICT tools and complexity required will vary between industry sectors and individual businesses (Kotelnikov, 2007). The complexity of adoption and usage will also vary between businesses with some taking incremental steps in developing and others immediately moving to more advanced applications (Tan et al., 2009). Driven by consumer demand, new forms of technology for business information flows and global access are emerging, for example, short message service, (SMS), voice over internet protocol (VOIP), multimedia messaging service (MMS), pod and video casts, as well as the use of social networking tools like Myspace, Facebook, Youtube and Twitter (McCutcheon, 2009). In reviewing studies of the factors that determine the level of ICT adoption by small business in general, Fink (1998) identified organisation size and readiness, CEO attitude, innovativeness, knowledge of ICT and internal support, perceived benefits, financial resources, external factors including competitive pressure, consultant and vendor support and user participation. However, many constraints inhibit SME development including: poor telecommunications infrastructure, limited ICT literacy, inability to integrate ICT into business processes, high costs of some ICT equipment, incomplete government regulations for e-commerce and poor understanding of the dynamics of the knowledge-economy (Khong Sin Tan et al., 2010). Additional constraints include lack of education and technical skills, limited government support, costs, risk, managerial leadership, security and legal issues, business complexity and skilled staff recruiting issues (Kogilah et al., 2008; Hashim, 2007). Various benefits and barriers to the implementation of ICT applications have been identified. Among the most prevalent benefits of ICT adoption include: - reduced operating cost in communicating with customers and suppliers; - increased speed in the delivery of goods by suppliers through better communication; - enhanced efficiency through better co-ordination of firms in the value chain; - closer working relationship among trading partners; - effective communication tool with customers; - bigger market exposure which opens the enterprise to new business opportunities; - enhanced access to market information and knowledge by means of improved information exchange with customers and suppliers; and - as a future tool in terms of facilitating new ways of managing and organizing businesses. Among the widely cited barriers to ICT adoption, include: - unsuitability for business as SMEs are not convinced of the financial benefits to be attained; 533 - lack of qualified IT personnel to develop and maintain the e-commerce system of the enterprise; - unavailability of a proper network infrastructure in the company; - high cost of IT equipment and setup; - expensive software prices; - imbalance between investment costs and return on investment; - uncertainty of legal issues surrounding ICT adoption; and - fears and concerns over ICT security (Tan et al., 2009). It is now widely accepted that ICT, ―provides many potential benefits to organisations so as to make them more efficient, effective and competitive‖ (Fink and Disterer, 2006 pp609). Applying social actor theory and a case study approach, they found that ICT infusion into the business is low for micro businesses who may look to facilitate interactions with the outside while small enterprises used ICT to supplement personal contact but within organisational boundaries and with little environmental or affiliate links. ICT was more extensively used in medium sized enterprises for both internally and external interactions. They conclude that increased organisational competencies, improved ICT skills along with business skills, are needed to maximise the business benefits. They also believe business needs to take a strategic approach to compete and cooperate and ICT interaction facilitates this with customers, suppliers, alliances and network formation. There has been extensive research interest in how ICT has impacted on rural tourism businesses (Mitchell and Clark, 1999; Grimes, 2000; Malecki, 2003; Braun, 2005a; Braun, 2005b; Braun, 2007), reducing ―the tyranny of distance‖ (Drabenstott, 2001), providing stable employment and bringing tourist expenditures into the local economy (Buhalis and Main, 1998). Tourism, especially small tourism business, remains central to rural development (Briedenhann and Wickens, 2004). The exponential growth of Internet users, globally, has critical implications for small to medium sized tourism enterprises (SMTE‘s), with various benefits for small business including value chain development and partnerships, increased productivity, enhanced efficiency, greater access to information and knowledge, information system capabilities and developing new clients (Kogilah et al, 2008; Hashim, 2007). However, there has also been concern expressed, where rural small to medium sized tourism enterprises SMTE‘s are not exploiting ICT that a two tier rural economy may result (Mitchell and Clark, 1999). In researching how ICT influences distance and business efficiency, Irvine and Anderson (2008) adopt ‗supply and demand‘ models to explore ICT usage in small Scottish rural hospitality businesses. They focussed on ICT‘s relationship to reducing rural isolation by providing information, through Internet sales and marketing and in improving service quality. They concluded that there was ―sound evidence‖ that ICT was ―well imbedded‖ in smaller rural hospitality businesses who overall were, ―sensible, informed and often quite sophisticated‖ in their ICT usage. However, while very attentive to the demand side, they also found, often these businesses were neglecting the supply side functions. 534 In a globalized economy, innovation, whether technical or organisational, has been viewed as critical to business success in tourism (Stamboulis and Skayannis, 2003; Buhalis, 2003; Matlay and Westhead, 2007). The concept E-innovation, the innovation of ICT and e- commerce, can enhance the performance of accommodation enterprises and assist in gaining competitive advantage, according to Milne et al. (2005). Other studies have focussed on ICT applications for better customer relations, (Martin, 2004), a more agile management and image improvement (Camison, 2000) and in supply chain issues (Cagliano et al., 2003). ―Electronic commerce (e-commerce) innovating applications have posed novel technical, organizational and commercial challenges‖ to the stakeholders involved with any business – customers, suppliers and networks – and can have ―critical impacts‖ (Jen-Her Wuand and Tzyh-Lih Hisa, 2004) Productivity has been another focus for researcher interest (Gretzel and Fesenmaier, 2001; Productivity Commission, Australia, 2001/2; Collins et al., 2003), but investments in ICT alone do not guarantee improved productivity. Critical of the shortcomings of past studies, which were, ―plagued with ambiguities and inconsistencies‖, Sigala (2003) proposes a new methodology for assessing ICT productivity which was tested in three star U.K. hotels. She found that only the full exploitation of ICT networking and ―informalizational capabilities‖ are likely to bring productivity gains from ICT investments. This is particularly so when ICT is fully integrated into business processes and when informational and transformational capabilities along with an alignment of business strategy and operations are in place. There has been substantial recent interest in social networking communication tools such as Twitter and Facebook by small businesses. A survey last year by a U.K. mobile-phone operator found that some 17% of Britain‘s small businesses were using Twitter. Many of the firms that responded said they were doing this to attract new customers. Some claimed they had been able to save up to £5,000 (over $US8,000) a year by cutting out other forms of marketing in favour of the networking service (o2 Telefonica). In another survey of 1,000 heavy users of social networks and other digital media (Razorfish, 2009), it was found that 44% of those following brands on Twitter said they did so because of the exclusive deals the firms offered to users. The connections made possible by social networks are helping to create new businesses as well as promote existing ones (The Economist, 2010). In 2008, a review of existing product marketing and booking channels used by both Queensland tourism operators and visitors was undertaken. The channels most commonly used by consumers to book attractions are at the front gate (49%) and via third party methods such as motoring associations (14%), booking desks (11%), travel agents (7%) and tourist information centres (6%). Prior to booking, personal contact, is important to many visitors to attractions, especially for international visitors and those visiting natural attractions (Tourism Queensland and Tourism Research Australia, QTRA, 2008). Further, the review found that many tourism attractions expect to increase their marketing spend on at-destination channels such as street signage, local television, billboards and sponsorship, as well as through cooperative advertising. The internet is seen by attractions as an excellent pre-departure planning tool for customers and although not expected to overtake bookings at the destination, an opportunity does exists to grow this segment, especially if the 535 booking system is linked to third parties. While most tourism businesses have a website, the review found, ―there is a significantly lower number of attraction provider‘s websites with direct booking capability (29%) compared with other tourism sectors such as accommodation (90%)‖ (Tourism Queensland and Tourism Research Australia, QTRA, 2008). A number of models have been developed to better understand the impact of ICT and e- commerce innovation and customer relations, for example, Ditto and Pille (1998) identified three levels of development (1) informational – a website based on one way provision of information, (2) transactional – enables customer communication through e-mails, telephone or post as well as photographs and ―virtual tours‖, and (3) relational – where customer interactivity develops a continuous relationship with the internet as a key factor in enterprise management. Another model of particular interest for the analysis in this study is that proposed by Demopoulos et al. (2008) where they provide a road map for ICT improvements through ―a strategic approach to information technology spending and planned investments‖. Categorising current performance metrics and spending on ICT, they have adapted a model based on Maslow‘s hierarchy of needs (1993) and the work of Nicholas Carr (2004) to apply social science concepts to information technology and the classification of investments, resulting in a four level progression from necessary infrastructure and basic tools to innovative and strategic ICT investments to achieve business transformation. METHODOLOGY For this paper, nine interviews were undertaken with small to medium tourist enterprises, (SMTE‘s) across the Goldfields region in order to obtain a broad understanding of a range of issues including current adoption, usefulness of applications and future intentions in developing ICT in the business. In addition, the respondents were asked to address four questions on the impact of the global economic crisis, as they viewed it, on their business. In the Goldfields region there are twelve Tourist Information Centres (TICs) who are located across the region, according to the Goldfields Tourism Incorporated (2009). These are located at Avoca, Ballarat (two centres), Beaufort, Bendigo, Castlemaine, Maryborough, Daylesford, Heathcote, Wedderburn, Maldon and St Arnaud (See Map of the region below). All nine businesses interviewed promoted themselves through the TICs. The interviews were conducted with a selected group following discussions and identification with a number of Goldfields regional tourism organisations. MAP OF GOLDFIELDS REGION IN CENTRAL VICTORIA, AUSTRALIA 536 The Survey Instrument and Delivery The survey instrument was initially developed from a research undertaken by the European e- business W@tch in 2006 (e-business W@tch) and while keeping the key areas to be addressed was re-adapted to local conditions in language, content and presentation following consultation with regional tourism bodies and industry consultants. The area of interoperability, contained in the European study, was omitted on the advice of various sources that believed it too technical for most SMTE operators and lacked relevance here. Below is a cross-referencing of the aims of the Study to the questions in the Survey questionnaire. CROSS-REFERENCING OF STUDY AIMS TO QUESTIONNAIRE Aims of Study Questions addressing these aims 1 The current level of usage of e-commerce and related applications Q14 – 16; Q18 – 26; Q31 – 47; Q49 – 51; Q55 - 57; 2 The impact of various ICT applications and Q27; Q48; Q63 537 functions on the business 3 Business operators views on the current usefulness of the technology to business operations Q52 – 55; Q59 - 61 4 How business operators see the further development of the technologies in their businesses Q13; Q28 – 30; Q58 Q62 5 The types of technology and services that are most needed to improve business operations To be determined following analysis of data N.B. Questions 1 to 12 are background to the business N.B.B. Question 13 is concerned with attitudes to the global economic downturn The key areas maintained were, as follows: 1. Current usage of e-commerce and related business technologies 2. Perceived business impact by operators 3. Perceptions of usefulness of ICT by operators 4. Current perceptions for future ICT development within the business The Interviews Following consultations with regional tourism bodies and with industry consultants, a selection of tourism businesses was developed and invited by telephone to participate in a one hour face to face interview. A schedule of interviews was prepared and the interviews with nine businesses were conducted over two weeks from the 16 th to the 27 th November 2009. The selected businesses were representative of a range of industry categories identified by Australian and New Zealand Standard Industrial Classification (ANZSIC). These encompassed one Parks and Gardens Operation, two Heritage Activities, two Scenic and Sightseeing Transport, two Accommodation and Food Services, one Amusement and Other Recreational Activities and one Creative and Performing Arts Activities. In addition, the selected businesses were from various regional locations; four in Bendigo, two in Ballarat, two in Castlemaine and one in Daylesford. Interviews were conducted with business owners or managers but in two cases, with the marketing manager. While limited in number the selected businesses encompassed a variety of locations and tourism business types. The nine businesses interviewed as part of this Study and their principal business activities are, as follows: Business A – Holiday Park – camping, caravans and cabins for on-site rental Business B – Themed night-time walking tours Business C – Historic icon, luxury boutique accommodation Business D – Tour operations company - heritage steam train tours, heavily reliant on volunteers Business E – Chinese Historical and Cultural Museum 538 Business F – Boutique luxury accommodation, restaurant and functions Business G – Historic Home and Garden, heavily reliant on volunteers Business H – Oversees several major tourism businesses Business I – Performing Arts and function centre in historic building Preliminary Comment on the Businesses Interviewed. Before discussion of the findings we make four preliminary points. Firstly, while all are operating as a business, five of nine are reliant on volunteers for their operations (D, E, G, H & I). Of these, businesses (D & G) are heavily reliant on volunteers, with few part-time staff and some partly reliant businesses (E, H & I). Secondly, some are reliant on sponsorship and grant monies and therefore had limited finance to invest in ICT, sometimes operating with just basic computer equipment and with volunteers to maintain equipment, for example (D & G). Thirdly, while it may be assumed larger businesses would be more advanced in their use of ICT‘s, at times small businesses were well in advance in their applications. For example, business (B) with just two full time employees and three casual employees operated as a virtual organisation with no office and interfacing both employees and customers with mobile telephone and a laptop. Fourthly, a number of the businesses interviewed are associated with other organisations that, in some cases, drove their ICT uptake. For example, business (A) is associated with the BIG4 network, who over 30 years, have become a well recognised national brand and network with a reputation for high standards, extensive facilities, a friendly atmosphere and international alliances (Big4 Holiday Parks). Another example is Business (I) whose ICT needs are supplied through the City of Greater Bendigo, the local government authority. The sections below presents a summary of the overall responses of the nine tourism business operators interviewed in relation to the six sections of the questionnaire. These were: 1. Impact of the Global Economic Crisis (GEC) 2. Internet Connectivity 3. Skills Development and Outsourcing 4. Online Sourcing and Procurement 5. Online Marketing and Sales 6. ICT Impacts Drivers & Inhibitors FINDINGS AND DISCUSSION The findings and discussion are presented in the order noted above. Impact of the Global Economic Crisis (GEC) 539 The sub-prime loan disaster of 2007 and the collapse of Lehman Brothers in late in 2008, in the United States, developed into a global economic crisis. Large European and American financial institutions had substantial difficulties with other financial institutions rapidly losing confidence. As a result, worldwide financial markets ceased functioning with credit worldwide increasingly unavailable (D‘Arista and Erturk, 2010). Although some calm has slowly been restored to worldwide financial markets, recovery in the real economy has been weak, a new regulatory regime is yet to be established with differing views between the E.U. and the U.S.A. and, indeed, within members of the European Community (Schneider and Cho, 2010). The interviews contained five questions related to the global economic crisis, the first dealing with impact on the business from 2007 to 2008, the second on the expected impact in the next twelve months, the third whether the global economic crisis was expected to last more than twelve months and the final question asked if business strategies to lessen any negative impacts had been developed. Respondents were asked to indicate their view on a scale of one to five with 1 for strongly disagree through to 5 for strongly agree. The results indicated that there was variation in the views of the impact of the global economic crisis from 2007 to 2008, with four of the nine claiming to have experienced a downturn while others not so and one unsure. Respondents were not given any other option for a business down turn and it appears to be more a possible cause rather than having been clearly determined. Those experiencing a downturn tended to be high-end market businesses, for example, luxury boutique hotels (C & F) and some tourist attractions (D & H) while others, usually iconic tourist destinations, (E & G) had not been effected. One business (A) as a low cost holiday destination had experienced a growth over this period. This may be caused by families bearing higher interest rates on household mortgages, having less discretionary income, a reduction in overseas travel by Australians in favour of domestic holiday travel and a focus on regional iconic tourist activities, for example, businesses (E & G). For the twelve months ahead, four of nine respondents (A, C, E & H) did not expect any impact from global economic crisis to continue but several anticipate that it will do so with an impact up to the next three years (E, D & H), while one was uncertain (F). Most businesses had developed, to varying extents, business strategies to lessen any negative impacts (B, C, D, F, G, H & I) although two had not (A & E) with one of these believing the global economic crisis to be of little concern. These responses may reflect business attitudes across the Victorian community. According to the National Australia Bank (NAB, 2010), currently business confidence strengthened again to the surprisingly strong levels of November 2009 and demand growth was of around 5% (annualised) over the last 6 months. The Victorian Employers Chamber of Commerce and Industry, reported in their VECCI-Commonwealth Bank Business Trends and Prospects Survey (VECCI, 2009), that in Victoria an increasing number of business owners believe that the economic crisis either will or has passed and confidence has improved but that business conditions which were mixed over the three months period with some issues, for 540 example, the Reserve Bank of Australia (RBA) expected to raise rates to 4¾% by end 2010, uncertainty over climate change policies and over consumer confidence, remaining uncertain. In the tourism sector, the most commonly identified factors constraining business growth over the November 2009 quarter were; environmental factors (including bushfire-related issues), wage costs, business taxes and government charges, and the cost and availability of insurance (VTIC, 2009). Internet Connectivity It is clear that access to broadband Internet and mobile telephony is not an issue for the tourism businesses interviewed (some choosing however not to use mobiles), who, it should be noted, are located in the two major regional cities and in the two major towns in the Goldfields region. This may not be the same result for those businesses which are located in more remote areas of the region. While all businesses had broadband three did not have wireless connection, either for cost considerations or for security and privacy issues. A majority of businesses did not have remote access from outside the business to the business computer network with just three providing this access for employees. While one respondent did not know if this was provided, another respondent saw it as essential, for example, so that diaries, bookings, rosters, etc could be shared with staff. All businesses interviewed had fixed line access and all except three (D, G & H) had mobile telephone connections, however, most businesses, six of the nine interviewed, did not use MMS, tools like pod & video casts or Virtual Private Networks (VPN) while one did not know of these technologies and one respondent stated, ―they were not yet needed‖. Only two respondents (B & C) used open source software. While open source software is a low cost alternative to proprietary software issues of security, service backup, staff trained on the system, the availability of system administrator tools and the number of version upgrades and patches issued by the developer serve to make most of these businesses avoid its use. However, open source software does have four key advantages: lower cost of ownership, reduced dependence on vendors, easily customised and an improving level of security. Despite these advantages many businesses do not see a significant value in adopting open source software (Computer Economics, 2005) Voice over Internet Protocol (VoIP), for example, Skype, is a relatively new technology that allows your computer's network connection as a telephone service. It is growing in popularity with calls cheaper than the normal phone network, particularly for long distance and international numbers. Of the nine respondents two were using VoIP, two were uncertain and five were not using this technology. Concerns remain over the use of VoIP regarding call quality, overall cost, reliability and other issues, thus, to date there has been a limited uptake. Several of these concerns were expressed by respondents. 541 Social networking websites are beginning to have an impact on small businesses, perhaps more so than larger businesses, by giving entrepreneurs free access to their audience through services such as Twitter, Youtube and Facebook which can be readily accessed by instant messenger service, the web, as well as with mobile texting, plus other venues. While with Twitter, for example, users are limited to 140 characters in sending out a message, it helps individuals with service and product marketing, with social networking promoting website traffic to specific websites and in staying in touch with people. Perhaps not surprisingly then, many of the businesses interviewed (six of the nine) are currently using social networking tools like Facebook, Youtube and Twitter, some at an experimental stage and others who are already achieving a good response. Of those not using such networks they are exploring the possibilities or are constrained by costs or time (B, D & G). The main disadvantage for small and medium size tourism enterprises (SMTE), like other SME, is that they tend to be time and resource poor, with their size being their main disadvantage with regard to ICT adoption (Werthner & Klein, 1999). A recent study on the nature of the change process when a regional tourism network seeks to adopt e-commerce, focuses on the nature of the network links. Applying an action-oriented methodology the study suggests a strong relationship between diffusion of e-commerce and network positioning, both in terms of place (status and position in the network) and space (the geographic make-up of the network). It found diffusion hinged on network cohesion and participants trust in and engagement with the network (Braun, 2004). All businesses interviewed were connected to at least one and often more local, regional and state based tourism networks, with one (C) to international tourist networks, through their websites, thus recognising the importance of network engagement. Skills Development and Outsourcing The issues of access to expertise in ICT network architecture, security and maintenance had a varied response with two businesses (A & I) having affiliations which addressed these issues for them. Other respondents had varied views with two (B & D) finding such access very difficult, three (C, E & F) finding it difficult, while for others (G & H) it was not a problem engaging such expertise. Fink (1998) identified knowledge of ICT and consultant and vendor support along with user participation as among factors that determine the level of ICT adoption by small business in general. This issue is of particular concern, with five businesses responding negatively to accessing ICT expertise, having implications for ICT service companies, who perhaps need to review their marketing, costs, customer service and post- service provision. Radio-frequency identification (RFID) is the use of an object (typically referred to as an RFID tag) applied to or incorporated into a product or person for the purpose of identification and tracking using radio waves. The technology can be used for transport, stocktaking and inventory, retail sales and for human identification. Some tags can be read from several meters away and beyond the line of sight of the reader. With regard to Radio Frequency Identification (RFID), one business met these needs through their affiliation with a larger organisation, one had personal expertise in this area, two had difficulty accessing expertise in 542 this area while another did not, and two saw this issue as not applicable while two did not recognise the name of this technology. The wide variation here may be related to differences in the size, nature and needs of the business respondents. Two businesses (A & I) have affiliations which addressed the issue of developing new business solutions for them, while most others found accessing this expertise difficult or very difficult (B, C, E, F, G & H), with only one (D) believing it was not a problem engaging such expertise. Again, two businesses (A & I) have affiliations which addressed the issue of ICT strategy and management for them while one (B) was able to address their own ICT strategy and management issues. Other respondents (C, D, E, F, G & H) finding such access to expertise in this area very difficult or difficult. Fink and Georg Disterer (2006), believe businesses need to take a strategic approach to compete and cooperate and ICT interaction facilitates this with customers, suppliers, alliance and network formation. Again there are implications for ICT service providers in these results. Outsourcing considerations depends on the particular circumstances of the business involved and includes considerations of existing contractual arrangements with service providers, how well their current communication needs are being met, their assessment of their future needs, the size of the organisation and, of course, its priorities for the human and financial resources available. Outsourcing of ICT services in the past twelve (12) months had substantially increased for seven of the respondents, remained the same for the other two, (B) having the resources internally and (D) with financial concerns. This indicates a wide willingness to invest and develop ICT applications, though apparently, with extensive dissatisfaction with the expertise and services provided. Regarding the issue of staff attending ICT e-learning programs, only two (E & I) sent their staff to such programs on a quarterly basis, while four (A, B, F & H) train staff via the Internet and intranet, and two (C & G) do not train staff at all but rely on volunteers or recruit staff with the required skills and leave training to be undertaken by the individual employee at their own cost. We can conclude that most businesses, where possible, understand the importance of keeping up with technology developments and are therefore committed to staff training in this area. This is pleasing as various researchers have concluded that constraints on further ICT development include lack of education and technical skills (Kogilah et al., 2008; Hashim, 2007), limited ICT literacy among employees (Khong Sin Tan et al, 2010) and the lack of qualified ITC personnel to develop and maintain the e-commerce system of the enterprise (Tan et al,. 2009). An online booking system technology will display booking availability in real time on a website and on the selected distributors‘ websites, accept payments from customers without requiring human interaction, make your product bookable on a variety of the selected distributors‘ websites, update inventory on a website and also on the selected distributors‘ websites when a booking is made (The Australian Tourism Data Warehouse). Direct customer booking services were available electronically from all businesses interviewed but while most had the facility on their website, three businesses (D, E, & G), took bookings by e-mail only, two because of limited financial capacity to develop their website and one for security concerns. The respondents appear to have identified some of the most prevalent benefits of 543 ICT adoption which, according to Tan et al. (2009), include reducing operating costs in communicating with customers, being an effective communication tool with customers and facilitating wider market exposure which opens the enterprise to new business opportunities. While the front gate was found to be the most commonly used by consumers to book attractions at (49%) according to the (Tourism Queensland and Tourism Research Australia, QTRA, 2008), of the respondents to this study, the percentage of bookings undertaken electronically, either via website, mobile phone or e-mail, ranged from less than 5% (A), 20% to 30% (C) with five (D, E, F, H & I) reporting between 5% to 10% taken and one up to 50% (B), via this medium. For all small business, government research found received orders taken via the Internet or web were 23.3% in 2006-2007 and increased to 23.7 in 2007-2008 (ABS, 2007-2008). The respondents to this survey appear to, on average, support the above figures. While the availability of online bookings appear mandatory, factors other than responding to customer demand, appear to drive this service. Five of the businesses offered online payment methods to their customers (A, B, C, F, & I), with payment facilities available through third parties, (e.g. Travel Click and Tickets.com), or through in the case of (A) their network partner. This may reflect the increasing confidence of customers in online payment methods, according to the St. George Bank, and is reflected in the study by Furnell & Karweni (1999) who found that while consumer regarded security with ―some concern‖, these ―were outweighed by the merits offered by the medium‖. In a later study, further developing the Technology Acceptance Model (TAM), which focuses the ease of use and usefulness to consumers, consumer intention to use online shopping was explored which, in addition to ease of use and usefulness, considered compatibility, privacy, security, normative beliefs and self- efficacy. Collecting data from 281 consumers, the Study found compatibility, usefulness, ease of use, and security to be significant predictors of attitude towards on-line shopping. Privacy, however, was not. Attitude toward on-line shopping, normative beliefs, and self-efficacy were indicators of future intention to use on-line shopping (Vijayasarathy, 2004). All of the respondents cited ICT spending as a proportion of their overall budget indicating an ongoing commitment to further development but with the majority not intending to expand that percentage of expenditure over the next four years beyond the current 5%. In the 2007- 2008 period up to 5% of the business budget for six of the respondents was devoted to ICT while one spent between 5% and 10% and two between 10% and 30%, the later having undertaken major spending on ICT during the period. Currently, less that 5% of the business budget was devoted to ICT by seven of the respondents while two respondents were spending between 10% and 30%. Of these two, one is a virtual business largely reliant on ICT while for the other it is ‗critical‘ to the development of the business. In three (3) years time five respondents anticipated ICT spending to be up to 5% in with further investments, three believed spending to be between 5% and 10% and one to continue past spending at between 10% and 30%, although the actual dollar expenditure for all businesses is expected to increase. 544 Many tourism operators, despite reductions in cost, regard their operations as too small to afford the necessary equipment, service on-going maintenance and to meet regular upgrading. By contrast, these operators have most to gain from improved efficiency and reach provided by advanced electronic communications technologies. (Australian Regional Tourism Handbook, Industry Solutions, 2002). Within the businesses, the level of ICT skills is described as high by two respondents and medium by five with two respondents describing these skills as low. Those describing their skills as high were a virtual business and major historic boutique hotel (B & C), while the two reporting low skills were a business reliant on part-time and volunteer workers and the other, a major tour operator who do not provide for on-line bookings and or payments (G & H). For most small to medium businesses, employing an ICT professional is neither feasible nor necessary and skills required operating the business thus medium to low. Expanded outsourcing of more highly technical expertise, as above, has been the result. As noted above, Fink (1998) identified knowledge of ICT and support as determining the level of ICT adoption by small business while Khong Sin Tan et al. (2010), believed limited ICT literacy inhibits SME business development. Thus, based on the results found in this study, with only two respondents rating there skills high, there is certainly room for further improvement among most businesses interviewed. For six of the respondents, further spending is seen as ―crucial‖ in developing their business (A, B, C, G, H & I), while for two (E & F) spending is based on what is required to keep up with suppliers and customers. One respondent (D), although financially constrained, would spend more if ―someone could demonstrate how best to go about it‖. It appears that these operators understand the importance of ICT to their business development. Technologies for collaboration, both internal and external, varied substantially between the various respondents. All had software to track sales, working hours and payroll or gather other metrics and used software, other than e-mail, to manage capacity or inventory. Eight of nine respondents could send and/or receive invoices electronically while just two of the business (A & F) uses a private intranet. Software applications for knowledge management, enterprise document management and enterprise resource planning or decision making software again varied between respondents with three currently using none of these applications (A, D & H), three using knowledge management (B, C & I), four using enterprise document management, three using enterprise resource software (B, C & I) and just one (F) using planning/decision making software. With all businesses interviewed having a website presence, all having booking facilities online (three by e-mail only) and five of the businesses offering online payment methods to their customers (A, B, C, F, & I) it would appear that these businesses are at the third level of development, based on the Ditto and Pille (1998), model, where customer interactivity develops a continuous relationship with the Internet as a key factor in enterprise management. 545 However, in the four levels ICT investment roadmap, proposed by Demopoulos et al. (2008), we may generalise to identify our participants being at level 2 - process and transaction optimization. At this level, ICT investments have sought to reduce expenses by automating key business processes and streamlining customer relations but, in our sample, not supply side, which remains relatively static for most respondents, as discussed in the next section. Online Sourcing and Procurement In regard to procurement and supply issues, online orders as with some other areas of ICT adoption, varied between the businesses interviewed, reflecting a range of tourism business types, the level of financial capability and perhaps awareness of business benefits. Online orders then made up approximately 2% (H), 5% (D & F), 10% (A), 50% (B) and 80% for the two boutique hotels (C & F) of all orders, with one (G) where the ICT system is not used in dealing with suppliers in any capacity. For two businesses (B & E) orders are placed to international suppliers, six (A, C, E, F, H & I) placed orders to national suppliers and seven to regional suppliers. A preference for placing orders to regional suppliers was expressed by a number of the respondents. Online ordering and e-sourcing activities have stayed the same for most businesses (C, D, E, F, H & I) while procurement activities have increased the number of different suppliers for two businesses (A & B) and, as above, one business (G) is not linked to any suppliers. Only one business (A) is linked directly to an ICT supplier, who is a partner organisation, while no other businesses interviewed are directly linked to a supplier. The findings above appear to concur with the findings of Irvine & Anderson (2008), who found in smaller rural hospitality businesses, ―sound evidence‖ that ICT adoption was ―well imbedded‖, but that while very attentive to the demand side, often businesses were neglecting the supply side functions. Online Marketing and Sales There was some variation in the extent to which the businesses interviewed received customer bookings via their website although all but three businesses (D, H & G) (the least financial, relying on volunteers, etc), having this application available. However, there was substantial variation in the percentage of orders taken from customers, one stating less than 5% (A) , two, between 5% and 10% (F & I), two (C & E) between 11% and 25% with just one (B), a virtual business, between 26% and 50%. While all businesses could take bookings by e-mail, three (D, G & H) could only take bookings by this medium. In comparison, the Sensis e-Business Report (2009a) of Australian small to medium businesses found 56% of all businesses took orders over the Internet and of these just over half (52%) took ten or less percent of their total orders/bookings in this manner. The figures from this research may also reflect the attitudes of customers who may want to speak directly to a person when making a booking. 546 While these variations indicate different levels of adoption of ICT and of electronic interaction with customers, they indicate that most businesses are exploiting the benefits identified by Tan et al. (2009), more effective communication with customers, reduced operating cost, enhanced efficiency, bigger market exposure opening new business opportunities and with improved information exchange with customers, enhanced access to market information and knowledge. With regard to the origin of customer bookings, seven businesses reported receiving orders mainly local and regional customers, five (B, C, D, E & H), from national customers (two mainly from this source) and just three (C, F & H) from international customers but only one business offered website based translation and real time money exchange rates for international customers who are making transactions. For the year ending December 2009, Tourism Victoria (2010) reported international overnight visitor estimates to regional Victoria had increased by 1.5% to 319,300. Thus, it appears businesses interviewed in this study may not be making enough effort to attract the potential international tourist especially since the Goldfields region did not appear in the top six Victorian regional destinations for this cohort. All businesses interviewed said their business website supports marketing and sales processes, provides information and visuals to customers and publish website offers to customers, while only four businesses are accessing business to business (B2B) and/or business to consumer (B2C) marketplaces (A, C, E & H). Almost all businesses are not linked to customers (A, B, C, E, F, G, H & I) with only one (D), so linked. This may indicate an immaturity and lack of full exploitation of the potential of using business to business (B2B) and/or business to consumer (B2C) marketplaces and the development of more sophisticated customer relationships. While seven of the nine businesses interviewed currently use customer relationship management (CRM) software to organise data about customers (B, C, D, E, F, G & I), two do not (A & H), although one of these is currently developing this facility with its nation-wide partner. Those using CRM were asked to rate its benefits as very helpful, helpful or insignificant. Five businesses (B, C, E, F & I) found CRM ―very helpful‖ with effectiveness for marketing, development of products and services and improving customer service, while two (D & G) agreed CRM was very helpful in marketing effectiveness, e.g. basic mail merges, helpful in improving customer service but insignificant in the development of products and services. In general, use of the CRM application indicates a focus on ICT applications for better customer relations (Martin, 2004) and a level of development and sophistication of businesses processes for this purpose. The complexity of adoption and usage will also vary between businesses with some taking incremental steps in developing and others immediately moving to more advanced applications (Tan et al., 2009). ICT Impacts Drivers & Inhibitors 547 For business (B), e-Business is critical to their operations because as a virtual business it relies substantially on ICT, while business (D) thought ICT very significant of business operations. All other businesses saw e-Business as significant to in business operations (A, C, E, F, G, H, & I). This commitment reflects the ―strong increases…(in) SMEs that have taken up e-commerce in the past year‖ (Sensis e-Business Report, 2009b). For four of the respondents (C, E, F & H) ICT adoption was driven by competitors, customers, suppliers and for government tendering purposes and likewise for businesses (A, B & I) except for government or other tendering activities. However, for two businesses (D & G) ICT adoption is driven only by customer demand. It would appear that from our sample, many sections of the tourism business environment are exerting pressure to drive ICT development. The issue of security remained the major concern for Australian SME‘s during the 2000 to 2009 period (49% expressing concern in 2006), while legal issues were not identified as an issue of concern (Sensis e-Business Report, 2009c). Almost all respondents (A, B, C, D, F, G, H & I) believed neither security nor privacy issues are considered an impediment for practicing e-Business with unresolved legal issues viewed likewise. However, legal issues around ICT, nationally and internationally, were viewed as of limited concern and only one business (E) who expressed concerns about security, privacy and legal issues which were considered an impediment for practicing e-Business. . To the question of ICT influence on the business, five of the nine businesses believed it to be a positive influence on revenue growth, efficiency of business processes, procurement costs, the quality of products services on customer service and internal work organisation. However, some businesses believed there was no influence on quality of products services (D, F & G), no influence on procurement costs (D, F, G & H) and finally, no influence on work organisation (A). All businesses believed ICT to be a positive influence on the productivity of the business. However, none were able to explain why they had this perception. This may be explained by methods of assessing ICT productivity being,‖ plagued with ambiguities and inconsistencies‖ (Sigala, 2003) whose study found productivity gains from ICT investments are only likely when full exploitation of ICT through networking and ―informalizational capabilities‖ are aligned with business strategy and operations. For three respondents, ICT was believed to have a very important influence on competition in the sector (C, D, & H), the business organisational structure (D & H) task and job descriptions (D & I) and for the education and training of employees and the out-sourcing decisions (I). Four others saw it as an important influence on competition in the sector (A, B, E & F) and the business organizational structure (A, B, E, & F), on education and training of employees (B, C, E, & F), on task and job descriptions (C, E, & F) and finally, on out-sourcing of decisions (F). For several businesses interviewed, ICT had less importance for education and training of employees (A & D) and the out-sourcing of decisions (A, B, C & D), task and job 548 descriptions (B ) and on business organisation structure (C & I). Other businesses, however, saw no impact from ICT on task and job descriptions (A & H), the education and training of employees and the out-sourcing decisions (D & H). However, one business (G) saw ICT as having no influence on all areas, competition in the sector, the business organisational structure and task and job descriptions, on education and training of employees and the out- sourcing of decisions. Clearly all but one respondent, whose ICT usage is limited, saw ICT as having an important influence, to varying degrees, on their business operations. With regard to business functions, ICT was perceived as having a high impact on management and controlling (C, E, H & I), on administration and accounting (A, B, C, E, F, H & I), on research and development, (A, B, E, H & I), on marketing & sales (A, B, C, E, F, H & I), on customer support (A, E, F, H & I) and for logistics and inventory (E & H & I). ICT was believed to have a medium impact on management and controlling (F), administration and accounting (D), research and development (C, D & F), customer support (C) and logistics and inventory (C, D, & F). ICT was also believed to have a low impact on management and controlling (D & A), logistics and inventory (A), customer support (B) and for business (G) it was perceived as having a low impact on management and controlling, administration and accounting, research and development, marketing and sales and customer support nor on logistics and inventory. Others perceived ICT as having no impact on logistics and inventory issues (I) and not relevant to marketing and sales and customer support (D). In the view of respondents the positive impact of ICT was felt on business functional areas to varying degrees across all businesses with just two exceptions, one constrained financially and the other having non-electronic logistics and inventory tracking methods. As well as facilitating innovation in various functional areas, e-Commerce is itself an innovation usually involving a cluster of separate innovative steps. Daniel, Wilson and Myers (2002) found four stages of e-Commerce innovation in small businesses of varying context and industry. The first cluster are where a business is currently developing their first e- commerce services; the second where the business are using e-mail to communicate with customers, suppliers and employees and at the third information-based are websites operating and are developing on-line ordering facilities are available. At level four, advanced adopters have on-line ordering in operation and are developing online payment capabilities. Over the past 12 months, various businesses interviewed believed ICT was directly related to a variety of innovative activities: for example, new or improved products or services, (A, B, E, & I), new or improved business processes (A, B, E, H & I), improved productivity (A, B, F H & I) with leveraging cooperation with industry and tourism networks (A, B, E, & F), helping to meet customer expectations (A, B, D, F, H & I), supplier relations (E, I) and business impact on international markets (E, F & H). Others strongly agreed, over the past 12 months ICT had assisted in the development of new or improved products or services (C & G), new or improved business processes (C & F), leveraged cooperation with industry and tourism networks (C & I), helping meet customer expectations through on-line information and services (C & G), facilitating new and/or improved customer service (B, F & G), in improving supplier relations (B & G) and for (B & C) impacting on international markets was uncertain. 549 Substantial agreement was also found that ICT had facilitated new and/or improved customer service and supplier relations (A), new or improved products or services (A, D & F), assisted new or improved business processes (A & D), improved productivity (A, D & E), leveraged cooperation with industry and tourism networks (A, D, G & H), helped meet customer expectations through on-line information and services (A & E), facilitated new and/or improved customer service (D & H) and improved supplier relations (D & H). Finally, in five businesses, ICT was seen to have had little or no impact on new or improved business processes (G) and no impact on productivity (G), on accessing international markets (A, G, D, & I) or on new or improved products or services (H). CONCLUSIONS At this point, we are able to draw a number of conclusions. However, we are currently in the process of collation and analysis of the second part of this research, an electronic survey of 477 SMTE from across the region. However, for this part of the study, we believe we have met our specific aims and achieved a better understanding of the ICT issues, and concerns regarding the current global economic crisis. Following the introduction where the study‘s scope and importance are outlined, we have reviewed some of the key literature concerning the issues under consideration and noted the models on which we intend to apply in analysis for a deeper understanding of our findings. Further, we have outlined the methodology for gathering our data with which we have presented the findings from the nine interviews and made some preliminary discussion. However, through our nine interviews, we now have a better understanding of Goldfields regional business attitudes to the current global economic crisis (GEC) which, while varied, as with the wider Victorian business community, show considerable concern, as evidenced by seven of our nine respondents having prepared business strategies to lessen any negative impacts of the GEC. Both internet, broadband and mobile telephony were accessible and exploited to varying degrees by all our respondents who, as noted above, are located in major regional cities and towns of the region. This may not be the same result for those businesses which are located in more remote areas of the region which we anticipate determining from our wider electronic survey of the region. While the use of various technologies varied among respondents, all had websites and it was particularly pleasing to find both awareness and exploitation of social networking tools to promote their business and interact with customers. Regarding the critical nature of the level of ICT knowledge and skill to business success, only two respondents described these as high, five respondents as medium and two as low. This is of some concern, as while there appeared to be a strong commitment to training and e- learning of staff, both through internal and external provision, reliance on service providers and outsourcing of ICT needs had substantially increased for seven on the nine respondents. In addition to any cost issues, a majority of respondents (5 of 9) found access to expertise in ICT difficult or very difficult. All respondents to varying degrees expressed a commitment to further development of their ICT capability evidenced in their current and intended spending on ICT. Finally, in relation to the Ditto and Pille (1998) model of ICT development five of nine respondents are at the highest level where the internet plays a key role in a continuous relationship with customers. In addition, in the ICT investment roadmap, (Demopoulos et al., 550 2008), we may generalise to identify our participants being at level 2 - process and transaction optimization where ICT investments reduce expenses by automating key business processes and streamlining customer relations. All businesses interviewed had electronic customer booking services with most (6 of 9) via their website and the other three e-mail interaction. The percentage of bookings approximated on average the comparable national figures. This demonstrates a clear commitment to meeting customer demand which is anticipated to continue to increase. However, supplier electronic ordering varied widely reflecting differing levels of financial capability and perhaps awareness of business benefits. Largely online orders were placed with national suppliers and regional suppliers with few ordering internationally. Essentially however, this area appears underdeveloped as there has been no growth in online procurement for most businesses (6 of 9) and only one business linked directly to an ICT supplier. Thus, supplier interaction remains very limited and there is extensive scope for developing supply side functions. We have identified extensive exploitation of ICT marketing and sales technology, with extensive information for customers, use of online booking and payment services, special offers and wide use (7 of 9 respondents) of CRM technologies, which were described as ―very helpful‖ by most respondents in a range of business activities. However, only one business was directly linked to customers. Few of the respondents were engaged in business to business (B2B) and/or business to consumer (B2C) marketplaces which may indicate an immaturity and lack of full exploitation of the potential offered. Further training and awareness are required. We may anticipate that this area will develop in future. Various ICT impacts have been identified as positive including the general impact of ICT on revenue, growth, efficiency procurement customer service, internal work organisation and productivity. In addition, ICT is perceived as an important influence on competition, organisation, education and training and outsourcing as well as having a high impact on a range of management functions. Customers were seen as the main drivers of ICT uptake and development with competitors, suppliers also driving uptake while few businesses interviewed appeared to recognise to potential of government or other tendering activities. ICT was also perceived as driving innovation in various business activities both internal and external. There was only limited concern for ICT security and privacy issues by the businesses interviewed who, likewise, did not see legal issues as inhibiting their e-commerce adoption. In sum, most participants are highly aware of and can identify the benefits of ICT and have developed various technologies and processes and making an on-going commitment to further ICT development. Areas needing further attention by all businesses interviewed include procurement and supply issues, accessing B2B and B2C marketplaces, delivery of supporting services and consultancies and raising the internal ICT skills. While we believe this paper has met our objectives and assisted in our identification of various areas, we acknowledge that further research is required. 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[email protected] Olakunle Ogunsanya Department of Business University of Wisconsin-Parkside 900 Wood Road, P. O. Box 2000 Kenosha, Wisconsin 53141-2000 262-595-2105 (tel) 262-595-2680 (fax)
[email protected] Dirk Baldwin School of Business & Technology University of Wisconsin-Parkside 900 Wood Road, P. O. Box 2000 Kenosha, Wisconsin 53141-2000 262-595-2105 (tel) 262-595-2680 (fax)
[email protected] ABSTRACT Online education, particularly in institutions of higher learning is here to stay. This paper examines current trends in online learning, with special emphasis on higher education institutions. It then details the history and experiences of a Midwestern US business school, accredited by the AACSB. The paper discusses trends over the years, issues encountered in the process, revenues earned, lessons learnt and student feedback. The paper concludes with highlighting what worked in the process of transitioning to online course offerings. INTRODUCTION Globalization has made the world a more dynamic structure and the introduction of well- developed technology and innovation, helps educational systems keep pace (Rogers 1995). The increasing flexibility of educational technologies allows teaching to be carried out almost as easily online, as they are currently offline. Both traditional and online systems of learning have similarities on their baselines, attributes and activities; starting with the primary aim of transferring knowledge and ideas from the Instructor to the students (Yero 2002). 559 Traditional learning systems required the physical presence of the students and teachers for interaction. However, online learning systems are simply classified as distance learning processes that do not require the physical presence of students at the same venue with their instructors; though this learning processes involves several media for communication ranging from lecture CDs to current innovative applications of the web ( SACS 2009). Online learning from the student standpoint offers a more convenient and flexible method of learning allowing work at a separate location while enrolling at the school of choice. As a result, the number of students interested in online learning has significantly increased in recent years. The National Center for Education Statistics reported that over half of the 5,010 higher educational institutions in the United States offered electronically delivered distance education courses during the 1997-98 academic year a 50% increase over the 1993-94 academic year (Moore, M). Online enrollments in the US have continued to grow at rates far in excess of the total higher education student population, with the most recent data demonstrating no signs of slowing. Over 4.6 million students took at least one online course during the fall 2008 term - a 17 percent increase over the number reported the previous year (Allen and Seaman, 2010). Two- year associate‘s institutions have the highest growth rates and account for over one-half of all online enrollments for the last five years. Baccalaureate institutions began the period with the fewest online enrollments and have had the lowest rates of growth (Allen and Seaman, 2007). This research is focused on an understanding of the current trends in online education, with special emphasis on UW Parkside, an AACSB accredited business school offering both undergraduate and graduate classes and located in the Midwest United States. AIMS AND OBJECTIVES OF STUDY The aim of the study is to examine the current trends in online education for institutions of higher learning, as well as validate those trends at UW-Parkside. The main objective of the study is to share our experiences so that other institutions considering offering online classes, can learn from our experiences. METHODOLOGY The methodology adopted will be through primary and secondary collection of data and analysis. Also, literature review and previous research ideas on online learning system will be considered. Source of Data and Information 560 The primary data is collected from the UW-Parkside, School of Business and Technology on the growth and trends and enrollment in online classes. Secondary data is obtained from texts, journals, articles and previous research data to present trends and future projections. History of Online Learning ‗Online learning‘ education started in the early 1800s as a Distance learning system with the idea of Sir Isaac Pitman. This early online learning system delivered courses through the postage of learning materials to students via mail (Blake et al. 2005). The introduction and advancement of sophisticated technologies in the 1900s resulted in many more changes to this method; a few organizations applied a radio-based delivery system in 1930s and television transmission in learning was used in 1940s. Since the 1960s technology played a vital role with large scale use of broadcast technologies as delivery systems. In the 1970s England started the Open University (Morabito, 1997) before the advanced development of use of internet web facilities in the 1990s when most schools adopted online learning systems. The Computer Assisted Learning Center (CALC) was founded in 1982 in Rindge, New Hampshire, as a small, offline computer-based, adult learning center. The center was based on the same premise as today: to provide affordable, quality instruction to individual learners through the use of computers. CAPA (Computer Assisted Personalized Approach), as a system was developed at Michigan State University and was first used in a small (92 student) physics class in the Fall of 1992. CALCampus was the first to develop and implement the concept of a totally online-based school in 1994/95 through which administration, real-time classroom instruction, and materials were provided, originating with the QuantumLink campus. This was a significant departure from earlier methods of distance education because no longer was the individual distance learner isolated from the teacher and from classmates. 1997 saw the release of WebCT 1.0 and the founding of Blackboard, followed by preliminary work on Moodle in 1998 and D2L in 1999 (Online learning history, 2008). The University of London was the first to offer an online learning course. University of Phoenix opened its doors in 1976 and by 2002, enrollment in the baccalaureate and graduate- degree programs neared the 50,000 mark, a 70% increase from the previous year. (Shea RH, 2002). Thousands of online courses, including degree and certificate programs, are now offered by universities worldwide. In 2001, MIT announced its commitment to make traditional classroom materials from virtually all of its courses freely available on the web. (Zhang et al, 2004). Today, a number of schools offer both traditional and online learning formats. Traditional learning methodologies are less flexible from a geographical standpoint thereby making it more difficult for most individuals to both work and study at different locations. Online learning environments are therefore a natural progression in learning. US Higher Education and Online Learning Online courses allow students greater flexibility in balancing their work, school, home, and social schedules (Mahoney, 2009). Online learning in higher education grew at an average annual 561 rate of almost 22 percent over the five year period from 2002 to 2006, with an estimated total of about 3.5 million students having taken online courses in fall 2006. Online student enrolment was at 3.5 million, reflecting a 10 percent increase from 2005, a jump that is much higher than the 1.5 percent growth in the overall higher education student population in the same period (Allen and Seamen, 2007). Table 1shows three modes used in offering online classes. TABLE 1: ONLINE LEARNING MODES 1 to 29% Web Facilitated 30 to 79% Blended/Hybrid 80+% Online Course that uses web-based technology to facilitate what is essentially a face-to-face course. May use a course management system (CMS) or web pages to Post the syllabus and assignments. Course that blends online and face-to-face delivery. Substantial proportion of the content is delivered online, typically uses online discussions, and typically has a reduced number of face-to- face meetings. A course where most or all of the content is delivered online. Typically have no face-to-face meetings Source: Allen and Seaman (2009) Today, the results for institutions that do not have any current online offerings are principally interesting for those studying online learning. Fully, about 45 percent of these institutions report increased demand for new online courses and programs. While this proportion is smaller than for institutions with online courses only (66 percent) or those with fully online programs (73 percent), it does represent nearly 300 institutions with no current online offerings that are reporting increased student demand to begin online learning system (Allen and Seaman, 2009). Slightly more than half of all colleges rated online learning as essential to their overall strategy. Among public and for-profit institutions, more than 60 percent rated online learning as essential, compared with less than 40 percent of private, non-profit colleges. Generally, the larger the college, the more important online learning was to its strategy (Carlson, 2004). According to the same survey, 70 percent of colleges reported that competition for the growing pool of students interested in online learning is increasing (Kolowich, 2009). About 90 percent of public higher education institutions now offer online courses, and 89 percent of private for-profit schools offer them. The laggards are private nonprofit schools, of which only 53 percent offer online courses (Rogers, 2005). Educators Consortia have been a common feature of US educational organizations within states or geographical regions, whereby schools undertake an enterprise or activity that would make a uniform and common practicing of the learning system. An educator tool like D2L, Blackboard, WebCt or Moodle can be used for offering courses. UW – PARKSIDE AND THE ONLINE EXPERIENCE 562 UW-Parkside was founded in 1968 to better serve the needs of a growing population in southeastern Wisconsin and is one of 13 four-year campuses in the University of Wisconsin System. UW-P is located in Somers, Wisconsin between Racine and Kenosha on 700 acres with natural prairies and woodlands. With a current enrolment of 5300 students of which 5175 are undergraduate and Faculty strength of 125, the school has a faculty student ratio of 19 to 1. The total budget for the school is at US $71 m with a state assistance of 35%. The 700-acre UW-Parkside, is accredited by the Higher Learning Commission and the North Central Association. The School of Business and Technology is accredited by the Association to Advance Collegiate Schools of Business-International; and the Chemistry Degree program is approved by the American Chemical Society. Department of Business The Department of Business at the University of Wisconsin Parkside is accredited by the Association to Advance Collegiate Schools of Business-International. The department has the largest enrollment in the University, - 660 in Business and MIS majors as of Fall 2009. The department is growing in enrollment, recording a 17% increase from Fall ‘06 to Fall ’09. With 95 MBAs, it is the largest graduate program in the University that recorded a 24 increase (+34%) from Fall ‘05 to Fall ’09. Combined, the enrollment has a growth of 5% per year. The department awards the most degrees in the University with 135 BUS & MIS grads per year over past 10 years, 5 years being the average time to graduate (w/3.14 GPA). The department also offers 7.3 Degrees per FTE (second highest in University). 91% of Business graduates are employed within 6 months of graduation and 95% of MBA students are employed upon graduation. History of Online Education at UW-Parkside Business School 563 Online classes were created more to solve a business need, rather than to follow the online trend. Prior to 2001, UW-Parkside offered all prerequisite courses, required courses and electives onsite. The School had difficulty staffing the MBA classes and few electives were offered. The department struggled to have a faculty size that would meet the students‘ desire for more electives. This led to a partnership with UW Eau Claire, another school in the UW system, to offer on-line courses. Back in the late 1990‘s, technology was not adequate and software to teach online classes was not available. Distance classes were offered in compressed video format. The school then had 16 regular and 16 elective courses. Collaboration with UW-Eau Claire and other UW Universities allowed the universities to share faculty resources, freeing more time to teach electives. Classes would then go on to become more internet based and move away from the video feed. Partnering with the Consortium Being a small university made it difficult to start new initiatives. The department did not have the resources, expertise, or servers to run an internet-based program. UW Whitewater was already in the process of developing its own on-line program. A few of the smaller schools in the state realized that they all were aligned in their plans to move in the direction of online courses. Four of these universities - UW Eau Claire, UW Oshkosh, UW LaCrosse and UW Parkside decided to pool their resources, collaborate forces and toyed with the idea of offering a totally on-line program. A consortium that would offer an online MBA program, was formed in 2001. The Consortium works together, sharing faculty resources, and offering a joint set of courses across universities. A Consortium can significantly benefit small schools. Students in these schools can have access to a range of classes that may have only been available previously to larger universities. (InvestorsWord.com). Consortium functions through channel like ‗D2L‘ which is a user-centric, web-based learning management system (LMS) for the delivery of online teaching and learning uniformity within/among members. As an educator product, Desire2Learn learning system performs the functions of a complete web-based suite of easy-to-use teaching and learning tools for course development, delivery, and management. D2L provides tools to help facilitate communication, collaboration and community building. The Consortium turned to Learning Innovations (LI), a company that focussed on online education. LI would support the creation and design of courses with good online pedagogy and with a consistent format that was attractive to the user. Learning Innovations had their own servers, which were staffed 24 hours/day. Also they would deal with a lot of logistics such as students registering on one campus, but being able to take courses that might be offered over four different universities. Students would pay learning innovations a distance education fee. However, at a later date, the Consortium decided to discontinue the partnership with learning innovations. UW Eau Claire developed their own expertise and now hosts the Consortium classes. Course Development Grant 564 In 2005-06 the UW Extension had a grant to support on-line education. The initiative focused on the problem that Wisconsin ranked #30 in the nation for students with a four-year degree. The initiative was to support additional education especially for individuals who already had two year degrees. The goal was to develop more online undergraduate classes, for such individuals. UW-Parkside wrote a grant proposal to include degree completion in MIS and a Project Management certificate. The goal was to get students to finish their degree in just four courses. All four project management courses as well as several (about 8) MIS courses were developed. The department received a $225,000 grant part of which is now utilized towards new course development. Faculty Buy-In Just like a normal curve, there was some committed faculty, some who were willing to entertain what was happening and others who would not even consider the idea. There was a core group of approximately five people who saw an opportunity. One of these was the leader and the other four were strong followers. There were also many interested but too busy to commit any time or effort to pursue the idea and several faculty members that were not interested in on-line education at all. It was estimated that about half of the faculty (then about 20 people) were in this last category. Revenue and Expenses. Online classes from the MBA consortium and the undergraduate classes produced significant revenue. There is a distance education fee charged for every online course, on top of the regular tuition fee that the student is charged. Currently the school charges an extra $100 fee per credit for online classes. The consortium charges $625 per credit for foundation courses and $650 per credit for electives. From the consortium alone, the department now makes an annual revenue of above US $200,000. Learning Innovation hosts the undergrad online classes offered exclusively by the department and UW Eau Claire hosts the consortium courses. Of course there is a cost to have this service. However, there is a willingness to pay on the part of the student. Recent questions faced by the department include: Is the cost greater for online courses versus on campus? We charge some fees, but a good portion goes to Learning Innovation. Is it possible to support the online classes internally? If the service is moved internally, there would still be cost to maintain, upgrade, serve materials, support online students and develop new courses. Does UW-Parkside have the expertise to perform these functions? Trends There are two significant trends. 1. Across the university more and more students are interested and are registering for online courses. Interest in our MBA program is also much higher. 565 2. The consortium has literally doubled in size and what started as modules that were offered once a year, have now to be offered every semester as classes have become full. FIGURE 1: ONLINE COURSE OFFERINGS 2006-2009 Source: Department of Business, UW-Parkside The Number of online Courses offered increased from 8 in 2006-07 to 19 in 2009-10 as showed in Figure 1. Some courses are also in the development stage. During the same period we experienced a dramatic increase in enrollment from 77 in academic year 2006-2007 to 288 (projected) in 2009-10, as shown in Figure 2. FIGURE 2: ONLINE STUDENT ENROLLMENT 2006-2009 566 Source: Department of Business, UW Parkside Issues While there could be any number of issues a department can face in the process of ―going virtual‖, we will attempt to list some of the major ones we faced through our experience. - Faculty involvement – As mentioned earlier, some of the faculty were very excited and came on board early while others are not willing to venture into online teaching. However, the percentage that is ―very reluctant‖ is now reducing, as they have seen the growth in the project management program with increased enrolment. The first year there were only about 12 students. This increased to about 20 students and now the courses are filled to capacity. - Consortium issues – The main concern was the someone outside of the UW-Parkside campus is helping to make decisions that influence our MBA program. How much control is a university willing to give up in a consortium arrangement? - Faculty Hiring – details on position descriptions when advertising for new faculty to list online teaching as a preferred or required qualification. As enrolment increased, we would also would have to hire those types of candidates that express an interest or currently have the experience with this type of class. - Assessment – This can be a major problem when offering online classes. It is difficult to know or prove that the registered student is actually the one taking the course. The question of how assessment is done to make sure the student is not having someone else do the work, (which would actually be committing fraud), is something that has to be answered. - There has been some trouble with teaching mathematical concepts online. Students may have a better response to more animation, voice simulation, small quizzes and lab environments. Programs are available that have these features, but UW-Parkside would need to creatively incorporate them into the current online offering or new courses. - When designing and developing courses, deadlines are important. The management of course development is difficult and crucial. 567 - Communication with students can be difficult. They sometimes have more than one email. Communications can get misdirected into someone‘s ―junk‖ box and students may not receive important information. - Faculty involvement in classes – One risk with online classes is that the faculty member may ―check out‖ of the class. What we mean is that they do not go in to check in with their classes on a regular basis. In these cases, students complain that their professors are not very involved in class. They need to stay on top of things and post messages and take part in discussions regularly. It has been discussed on whether guidelines should be set so all professors follow that same rules. - Online course changes are usually completed prior to the semester starting while professors in traditional classes may make changes as the course progresses during the semester. There is much more intense planning and vision that needs to take place in order to design the course. When students are given access to the course, they have access to all the material in the course, including readings for every week. This means a lot of upfront work in terms of design and development on the part of the Faculty, before the course is hosted. What Works? - When a student asks a question that requires a sensitive answer, the professor can easily address that without the possibility of embarrassment or tact that often is necessary in a classroom, where they would have to redirect the inappropriate comments. - The course content allows students to learn over time. The more active the student, the more success there is in the program. - Online discussions are frequently better than classroom discussions because the students are more prepared. - There is also the opportunity to incorporate diverse teaching styles online. Presenting games to students that will make them think allows risk management and simulations that could not be possible in the classroom environment. Lessons Learned - Partnering with someone with expertise online was key. Also, having experts design the courses and take care of the logistics, helped. - Online summer courses was very useful for our students. It provided great flexibility to allow students to balance work and school. - Asynchronous learning was very helpful. This allowed students to attend, that never set foot on campus. The project management certificate is being sought from a variety of departments, like theatre or art department, as well as from employees from large companies in the region. We are able to get these students because the course is offered online. The average number of students in this category is probably about 3-5 out of every 30 students. 568 Student Feedback May positive comments have come in from the students. They like the high involvement from the professors. They like that the courses are current and not outdated. Class discussions can be better. Students are able to think more about their responses. Questions can be answered by the professors more directly and to the point, more than in a classroom setting. When a student asks a question that requires a sensitive answer, the professor can easily address that without the possibility of embarrassment or tact that often is necessary in a classroom, where they would have to redirect the inappropriate comments. CONCLUSIONS With 90% of the school’s students working full time, online courses are popular particularly with our non-traditional students chiefly because of flexibility. The Business department is developing a large portfolio of online courses (12 courses +3 currently in development), with the current Summer 2010 schedule including 7 online business courses. With the way enrollment has increased in both our individual online as well consortium classes, and trends indicating a positive trend, we are poised for continued growth. We started out small with a few courses, but our growth reflects the overall trends in online enrollment in the US. There continues to be issues to deal with, like revenue versus cost and faculty involvement. Our one takeaway from our experience in starting online classes as a small school is that collaboration with other similar schools in size and vision was the key in our growth. With continual positive feedback from our students and are enrollment trends in the last few years, we are confident that UW-Parkside’s offerings and online enrollment numbers will continue to grow. 569 REFERENCES Allen, E.I and Seaman, J. (2010). Learning on Demand - Online Education in the United States, 2009 The Sloan Consortium and Babson College Survey group report. Allen, E.I and Seaman, J. (2007). Online Nation Five Years of Growth in Online Learning, Babson Survey Research Group And The Sloan Consortium report. American Council on Education (1962) Federal Role in Education, The Science Newsletter Vol.81 No.5 pp.71. Blake, C. Gibson, J. W. and Blackwell, C. W. (2005). What you need to know about the web Supervision, 66, 3-7. Retrieved from September 18, 2008 from Wilson Select Plus database. Carlson, Scott. (2004). Online-Education Survey Finds Unexpectedly High Enrollment Growth. Chronicle of Higher Education, 00095982, 11/26/2004, Vol. 51, Issue 14 www.desire2learn.com/online learning accessed from desire2learn website on April 8 th 2010 Euler M and Von Berg D. (1998). The Use of Electronic Media in Open Learning and Distance Education, Paris: UNESCO. InvestorWords.com http://www.investorwords.com/1049/consortium Accessed on April 11th, 2010 Kolowich, S. (2009). Recession May Drive More Adult Students to Take Online Classes. Chronicle of Higher Education; 1/16/2009, Vol. 55 Issue 19, pA11-A11, 1/3p Mahoney, S. (2009). MINDSET CHANGE-Influences on Student Buy-In to Online Classes. The Quarterly Review of Distance Education, Volume 10(1), 2009, pp. 75–83 Moore, M.G. (2010). Distance Learning trends in the US. Accessed from http://www.tbc.dk/pdf/michael_moore.pdf on April 15, 2010 Morabito, M.G Foundations of Distance Education. Accessed from http://www.eric.ed.gov/ERICDocs/data/ericdocs2sql/content_storage_01/0000019b/80/14/ff/9 b.pdf on April 15 th , 2010. Online learning history, 2008. Accessed from http://docs.moodle.org/en/Online_Learning_History on April 15th, 2010. Rogers, C. (2005). Online Degrees Gaining Acceptance, Enrollment. EduExec; Vol. 24 Issue 12, p4-4, 1p Roger E.M (1995) Diffusion of innovations, Free 4 th Edition New York. SACS (2009) Distance and Correspondence Education, Policy Statement (Revised Principle June 2009). 570 Shabha, G. (2000). Virtual universities in the third millennium: an assessment of the implications of teleworking on university buildings and space planning. Facilities, 18(5), pp. 235-244. Shea, R.H. (2002) Learning today—As an industry shakes out, the survivors offer no-frills education for grown-ups. U.S. News and World Report October 28. 2002. Yero J (2002) Teacher‘s Mind Resources: http://www.Teachermind.com Access 03/08/2010 Zhang, D;Zhou, JL., Zhou, L and Nunamaker, J.F. (2004). Can e-learning replace classroom learning? Communications of the ACM; Vol. 47 Issue 5, p75-79. 571 EFFECTS OF RECENT GLOBAL MELTDOWN AND MARKET VOLATILITY IN INDIA: AN ECONOMETRIC INVESTIGATION ON S&P CNX NIFTY SPOT AND FUTURES Dr. Malabika Deo Professor & Head of Commerce, Department of Commerce (SOM), Pondicherry Central University Kalapet, Puducherry 605 014. INDIA. E-mail:
[email protected] Tel: 0413-2654694; 0413-2340755 & 9442140745 K. Srinivasan (Corresponding Author) Ph. D Scholar, Department of Commerce (SOM), Pondicherry Central University Kalapet, Puducherry 605 014. INDIA. E-mail:
[email protected] Alternative Email:
[email protected] Tel: 0413-2654694; 9488818116 & 9942099696 572 ABSTRACT This paper examines the effects of recent global meltdown and market volatility in India by investigating S&P CNX Nifty spot and futures markets for the period from January 1, 2004 to August 31, 2009 with a total of 1407 observations and it is broken into pre-crisis and post-crisis respectively. First, to check the stationarity of the series we used preliminary statistics like Augmented Dickey Fuller test and Phillip Perron test for spot and futures market variables. The Symmetric Generalized Autoregressive Conditional Heteroskedasticity (1,1) model were applied to examine the volatility persistence in the spot market by using dummy variables. Cointegrating regression augmented Dickey Fuller (CRADF) and Vector Error Correction Model (VECM) was employed to investigate the casual relationship between spot and futures market in both short and long run equilibrium. The uncorrelated residuals of VECM were applied to investigate the lead- lag relationship between the bivariate variables. The empirical evidence suggests that there was a significant change in the post crisis period for spot and futures market volatility. Our result suggests that the loss of investor‘s confidence in the value of securitized mortgages resulted in liquidity crisis that prompted a substantial injection of capital into financial markets. Finally, the comprehensive financial sector reform like International Financial Reporting Standards (IFRS) and Basel II Accord will strengthen the financial markets to deal with the complex challenges environment. Keywords: Nifty Spot and Futures, Volatility, Price Discovery, GARCH, CRADF, VECM JEL Classification: C22, C52, G13, G14 573 1. Introduction Global meltdown is often considered as a synonym to depression, in fact it is a decelerated phase where everything goes downhill and everything goes berserk. In short, there was a decline in a country‘s gross domestic product (GDP) growth for two or more consecutive quarters of a year, during the phase of meltdown the profits, employment, investment spending and household incomes was experiencing a regular fall-down. Due to global meltdown the economic growth will be negative for two consecutive quarters; it signifies a fall in real GDP, lower National income and lower National output. Global meltdown has negative impact on economic growth and makes unconstructive impact on the nation. The effect of global meltdown is often characterized by following factors – impulsive rise in unemployment, rise in government borrowing, sharp decline in stock markets and share prices, lower inflation and fall in investment. Global meltdown becomes a pessimistic phase for the ruling government as it is burdened up with extra weight of borrowing. This paper investigates the effects of recent global meltdown and volatility persistence in India and makes a resounding impact on share market, due to global meltdown the share markets look shaky and share-holders often face disappointment, which leads to low profitability and low dividends. Many a times shares price fall sharply, as an anticipation of predictable financial catastrophe, arising out from the fear of recession. It is not always that share prices fall as there can be any other reasons for their decline. A meltdown will reduce the appropriate demand and correspondingly will enforce pressure on the prices and will rage out price-war in the market, this may lead to decline in rates and so it might results into lower inflation rates. In the phase of global meltdown, the investor always feels finicky and shaky to invest as the fear of acquiring substantial profits increases manifold. The investment in the market becomes more unstable and it affects the economic growth. It leads to lowering of economic growth and simultaneously other related aspects of it. Recently, a great deal of attention is given to the wide ranging global meltdown and its impact on various sectors of the economy, which provoked the researchers, academicians and policy makers to study in-depth analysis in the existing scenario and to bring out suggestive policy guidelines to contain the down turn and withstand the ill effects of meltdown. The impact of spot market volatility, price discovery and lead-lag relationship explains how the information disseminates from one market to another. It has been argued that the lead lag relationship between spot and futures market returns can be attributed to one or more market imperfection like differences in transaction cost, liquidity differences between two market, short selling restriction, dividend uncertainties, and differences in margin requirements. Pursuing research on this controversial topic will leads to following questions; first does the global meltdown influence futures price volatility in the spot market. Second, whether there exists a long-run equilibrium between the spot and futures market variables. Third, the lead-lag relationships between spot and futures market innovations are examined. Even with a perfectly specified and estimated volatility model, the impact of global meltdown is inherited by futures market volatility, subsequently it transferred to spot market affecting the current level of volatility. The remainder of this paper is organized as follows: We present a brief review of antecedent 574 literature in Section 2. Section 3 introduces the data and sample size conducted in this study. Section 4 describes brief discussion about Econometric methodological issues concerning to the impact of recession on futures market on the underlying spot market volatility for pre and post crisis period, while Section 5 incorporates the data used and validity of the assumptions made about the model. Finally, Section 7 summarizes and concludes. 2. Review of Literature Though there is a vast amount of literature focusing on the impact of derivative trading on spot market volatility in developed markets. Figlewski (1981) studied the impact of futures trading on Government National Mortgage Association (GNMA) by using standard deviations of the returns and concludes that the volatility of underlying asset were increased after the introduction of futures markets. The introduction of futures trading has not induced any change in spot market volatility in the long-run, but the futures markets induced short-run volatility on the expiration days of futures contracts Edwards (1988). Harris (1989) examined the volatility effects for pre-futures and post futures and suggests the increase in volatility was a common phenomenon in different markets and index futures may not be the cause. Bessembinder and Seguin (1992) examined the dynamic relationship between futures trading activity and spot market volatility for United States. Kamara et.al (1992) investigated the impact of futures trading on spot market and indicates the volatility of daily returns in post futures period was higher than the pre futures period. Antoniou and Holmes (1995) found that the introduction of stock index futures caused an increase in spot market volatility in the short run while there was no significant change in long run. Butterworth (2000) found no significant change in the volatility of FTSE-250 index after onset of futures trading. Board, Sandmann and Surcliffe (2001) shows contrary to regulatory concern and the results of other papers, contemporaneous information less futures market trading has no significant effect on spot market volatility. In contrast to the above studies, Bansal, Pruitt and Wei (1989) and Skinner (1989) found that option trading reduces the volatility of underlying spot markets by employing ARIMA model and reveals that active futures market trading are associated with decreased rather than increased volatility of the spot market by enhancing the liquidity and depth of the spot markets. Similarly the studies by Chatrath, Arjun, Ramchander and Song (1995) indicate that S&P 100 options market has a stabilizing effect on the underlying index. Phil Holmes (1996) examined the relationship between futures trading activities and stock market volatility in UK stock market and observed the inception of futures trading has a beneficial impact on underlying spot market. Furthermore, the recent studies of Bologna and Cavallo (2002) for Italy. Thenmozhi (2002), Nath (2003), Raju and Karande (2003) for India and Goodfellow and Salm (2008) for Poland have found that the onset of stock index futures trading had decreased the volatility of underlying spot market. Several studies, both theoretical and empirical analyze the relationship between the spot and futures markets. The early study by Similarly, Kawaller et al. (1987) use minute to minute data on the S&P 500 spot and futures contract and prove that futures lead the cash index by 20- 45 minutes. Herbst, McCormack and West (1987) examine the lead lag relationship between the 575 spot and futures markets for S&P 500 and VLCI indices. They find that for S&P 500 the lead is between zero and eight minutes, while for VLCI the lead is up to sixteen minutes. Stoll and Whaley (1990) find that S&P 500 and MM index futures returns lead the stock market returns by about 5 minutes. Similarly, Cheung and Ng (1990) analyze price changes over fifteen minute periods for the S&P 500 index using a GARCH model. Chan, Chan, and Karolyi (1991) use a bivariate GARCH model and find that S&P 500 futures returns lead spot returns by about five minutes. Abhyankar (1995) observed that futures market leads spot market returns during the period of high volatility. Turkington and Walsh (1999) examine the high frequency relationship between SPI futures and AOI in Australia and evidenced bidirectional causality between the two series. Kavussanos and Nomikos (2003) investigated the casual relationship between futures and spot prices in the freight futures market and found that futures price tend to discover new information more rapidly than spot prices Thenmozhi (2002) examined the lead-lag relationship between stock index futures and spot index returns and reveals that futures trading returns lead the spot market. On the other hand, Raju and Karande (2003) examined the price discovery between the S&P CNX Nifty and its corresponding futures during the period 2000-2002. Cointegration technique and Error Correction models were employed for examining the objectives. The analysis revealed that price discovery occurs in the both futures and the spot market. Similarly, the study of Mukherjee and Mishra (2006), Kapil Gupta and Balwinder Singh (2006) investigate the spot and futures market returns and observed there exists a bidirectional relationship between these variables. Recent study by Shalini Bhatia (2007) employed Cointegration and VECM to examine the intra day lead-lag relationship between S&P CNX nifty spot and futures market and suggested that nifty futures lead the spot index by 10 to 25 minutes. In contrast, there exists a little work on the impact of global meltdown on spot and futures volatility on Indian stock market. To shed light on this issue, we employ GARCH (1,1) model to examine the impact of global meltdown on spot market volatility for pre and post futures periods by using a dummy variables. The Engle- Granger approach is used to test the long-run equilibrium relationship between spot and futures market variables by Error Correction Models (ECMs). The uncorrelated residual series generated from Vector Error Correction Model were used to check the lead-lag relationship between the bivariate series by using Granger causality test, which may be important for the investors, academicians and researchers. 3. Data Sample and their Properties This paper investigates the effect of global meltdown on spot market volatility and determines the dominant role played by spot and futures market in price discovery process. The dataset for S & P CNX Nifty spot and futures markets were obtained from NSE (National Stock Exchange) and the contract specifications and trading details are available from their website terminal. The S & P CNX Nifty is a well diversified stock index comprises of 50 most liquid stocks accounting for 23 sectors of the economy. The returns are calculated for daily closing prices for S & P CNX Nifty spot and futures market between January 1, 2004 and August 31, 2009 with 1407 observations. The period prior consist of 755 observations, where the government policies and subprime lending crisis expanded dramatically. The financial crisis of 576 January 1, 2007 to August 31, 2009 has been called the most serious financial crisis since the great depression by leading economists Ben Steverman and David Bogoslaw (2008). During the period of study, trading on derivatives segment takes place on all days of the week except Saturdays and Sundays as holiday declared by the exchange in advance and the securities trade from 09: 55 hrs to 15: 30 hrs. Since most trading activities take place in the near- month contract, only near-month contract are examined. The closing price indices were converted to daily compounded return by taking the log difference as R t = log (P t /P t-1 ), where P t represents the value of index at time t. S & P CNX Nifty is owned and managed by India Index Services and products Limited (IISL), which is a joint venture of NSE and CRISIL. All the observations are transformed into natural logarithms so that the price changes in returns prevent the non-stationary of the price level series approximate the price volatility. 4. Methodology Before estimating GARCH (1,1) model, the first step in time-series data is to determine the order of integration for each return series using Augmented Dickey Fuller (1979) test and Phillips and Perron (1988) test. Since most of the time series have unit roots as many studies indicated including Nelson and Plosser (1982), Stock and Watson (1988) suggest that the time series are non-stationary, the conventional regression techniques based on non-stationary time series produce spurious regression Granger and Newbold (1974). The spot and future market return series should be examined for I (1) first. 4.1 Generalized Autoregressive Conditional Heteroskedasticity (GARCH) The effect of global meltdown on spot market volatility was examined by applying the methodology developed by Engle (1982) autoregressive conditional heteroskedasticity (ARCH) model, which were the most extensively used time-series models in the finance literature. The ARCH model suggests that the variance of residuals at time t depends on the squared error terms from past periods Engle (1982). The residual term ε it is conditionally normally distributed and serially uncorrelated. The strength of ARCH techniques was well established and specified for economic variables, the conditional mean and conditional variance are the two main specifications. A useful generalization of this model is the GARCH parameterization introduced by Bollerslev (1986) extended Engle‘s ARCH model to the GARCH model and it is based on the assumption that forecasts of time varying variance depend on the lagged variance of the asset. The GARCH model specification is found to be more appropriate than the standard statistical models because it is consistent with return distribution, which is leptokurtic and it allows long- run memory in the variance of conditional return distributions. As a result, the unexpected increase or decrease in returns at time t will generate an increase in the expected variability in the next period. The GARCH (1,1) model works well in most applied situations Bollerslev et.al (1992). The basic and most widespread model GARCH (1,1) can be expressed as; 577 t t t bR a R c + + = ÷1 1 | (0, ), t t t I N h c ÷ 2 0 1 1 1 p q it i t j t j i j h h u o | ì ÷ ÷ = = = + + ¿ ¿ Where, R t denotes the realized return, h it is the conditional variance, which is proxies by R t-1 , α, β and λ are the coefficients to be estimated. The sizes of β and λ parameters measure the volatility dynamics of the time series. The λ scaling parameter h t now depends both on past values of the shocks, which captured by the lagged squared residual terms, and on past values of itself, which are captured by lagged h t terms. The β parameter refers to the last periods forecast variance, the larger coefficients value of GARCH term characterize the shocks to conditional variance take a long time to die out. The GARCH is weekly stationery Σβ i + Σλ j < 1, the latter two quantifying the persistence of shocks to volatility Nelson (1992). The parameter for GARCH (1,1) model indicate, the persistence of volatility shocks mainly depends on β i + λ j Engle and Bollerslev (1986), Engle and Mustafa (1992). An increase or decrease in β i + λ j point out the introduction of futures trading increase or decrease persistence of volatility shocks. 4.2 Cointegrating Regression Augmented Dickey Fuller (CRADF) The existence of long-run equilibrium relationship between cash and futures market series were examined by Engle-Granger approach on the following regression equation; 0 0 t t t S f z o | = + + 0 0 t t t F s z o | = + + Where, S t and F t are the logarithms of price changes on contemporaneous cash and futures prices at time t and z t is the disequilibrium error, the deviation from long-run equilibrium. 4.3 Vector Error Correction Model (VECM) If the non-stationary series with the same order of integration may be cointegrated for spot and futures markets, then there exist some linear combination of the series that can be tested for stationarity, the adequate method to examine the issue of causation is the Vector Error Correction Model (VECM) is expressed as follows; , 1 1 , 1 , 1 , 1 , 1 1 n n s t j s t j j f t j s t s t j j R R R z v o | ¸ ì ÷ ÷ ÷ = = = + + + + ¿ ¿ , 2 2 , 2 , 2 , 1 , 1 1 n n f t j f t j j s t j f t f t j j R R R z v o | ¸ ì ÷ ÷ ÷ = = = + + + + ¿ ¿ Where, R s,t and R f,t represents spot and futures price returns at current period ‗t‘. The stationary disturbance was denoted by v and Z t-1 was the error-correction terms. Since Vector Error Correction Model (VECM) can capture both the short-run dynamic and the long-run equilibrium relationship between variables, we use it to estimate the relationship between cash 578 and futures market variables. The coefficients of lagged returns γ 1j and γ 2j stand for short-run dynamics. These hypotheses can be tested by applying F-statistics for exploring the joint dynamics of the lagged estimated coefficients of R s,t and R f,t . Furthermore, the error correction coefficients are used to explain the speed of adjustment towards the short-run and long-run equilibrium by correcting the changes in spot and futures markets. 4.4 Granger Causality test The unautocorrelated residuals of v s,t and v f,t are obtained from VECM are used for Granger (1969) causality test to estimate the lead-lag relation between the spot and futures market series. This test were used to check whether the lagged futures returns improve the accuracy of spot returns beyond the lagged spot returns alone by using the following hypothesis; H 0A : R f,t does not Granger cause R s,t (that is, γ 1j = 0 for all j). H 0B : R s,t does not Granger cause R f,t (that is, γ 2j = 0 for all j). A lead lag between the spot and futures series were described by using the following models; , , 1 l n s t l f t t l n R b R o c =+ + =÷ = + + ¿ The coefficients with positive subscripts (b +1 ) and negative subscripts (b -1 ) denotes lead and lag coefficients, respectively. If the lead coefficients are significant, spot returns leads the futures returns whereas if the lag coefficients are significant the futures returns leads the spot returns. The computed raw data for estimating the lead lag relation between the variables may suffer from infrequent trading bias and leads to misleading conclusion Both Stoll and Whaley (1990) and Chan (1992). As a result, the lead lag relation was investigated by using the return innovations where the portion of spot price changes due to infrequent trading days were filtered out for the analysis. 5. Results & Discussion Table 1 provides the summary statistics for daily S & P CNX Nifty spot returns series for the entire period, pre period and post periods. For the entire and post periods, the average daily return is negative in contrast to the pre period when it is positive. Following, the economic meltdown for the standard deviation of returns more than doubles. The third and fourth moments of daily returns series for all periods indicate that the empirical distributions are not normally distributed; they are skewed to the right and leptokurtic. This is also confirmed by the results of Jarque–Bera test of normality. Spot returns have significant autocorrelation coefficients in all periods at 1 per cent level of significance. 579 The explosion of testing the stationary of the time series data should be kept into consideration for testing the presence of unit root in the variables, otherwise the analysis may produce spurious results. Each of the spot and futures price series was first examined for I (1), which is carried out in two step process for Pre, Post and Entire meltdown period and reported in Table: 2. We conduct the unit root tests using both the Augmented Dickey Fuller (ADF) test and Phillips-Perron (PP) test, on the levels and first differences for the bivariate variables. Besides, the unit root test results concludes that both the series are found to be stationary at first order differencing and integrated at the order of I (1). The objective of the study is to examine the effect of global meltdown on underlying spot market volatility to news. The results of GARCH (1,1) estimation with dummy variables are reported in Table: 3. The results evidence that the S & P CNX Nifty spot was found to be positively significant at 1 per cent level implying that the series financial crisis since the great depression has an impact on volatility in the stock market. In mean equation the lagged return series were found to be insignificant for pre and post period. The coefficients of β 1 were found to be significant at all the estimates, but the β 1 effects were found to be escalating in post periods at 0.1025 per cent. The large coefficients of β 1 indicate that shocks to conditional variance take long time to die out and hence volatility is persistence. The α 1 for pre period and post period were observed with 0.1841 and 0.1322 respectively. It is clear, that the α 1 effect were found to be higher for pre crisis period, it is an indication that the market is less persistence and more reactive in volatility. So, the volatility position in β 1 for post period suggests that the recent information is more important than old information and the information decays very fast. The last column of Table: 3 exhibits the persistence of volatility shocks depends primarily on (β 1 + α 1 ) is generally close to unity. The overall volatility persistence for the entire period stood at 0.9671, but there was a decrease and increase in pre and post period crisis with 0.9412 and 0.9918 respectively. Hence, the high value of β 1 + α 1 implies long memory volatility persistence in spot market for post period. The Engle-Granger Cointegration tests for forward and reverse period regression for S & P CNX Nifty spot and futures market series are reported in Table: 4. The Cointegrating Regression Augmented Dickey Fuller (CRADF) test statistics and their associated lag values are examined to test the autocorrelation function of the bivariate series. Taking into account the results from both tests, we reject the null hypothesis of non-cointegration at 1 per cent level for all the periods considered for the purpose of analysis. Therefore, we proceed with the estimation of a Vector Error Correction Model (VECM). It can be concluded, that the two markets are linked in the long-run and short-run equilibrium. The lag lengths for the two bivariate series are estimated using the Vector Error Correction Model (VECM) for entire period and two sub periods are determined on the basis of Akaike Information Criterion (AIC) and Schwatz‘s Bayseian Information Criterion (SIC) and the tests results are reported in Table: 5. The coefficients of ECM t-1 for entire period and pre period are statistically significant at one per cent level, which is an indication of bidirectional error correction. Whereas, in the post period, the value of ECM t-1 were found to be significant at one per cent level, but the futures market were envisaged with insignificant effect. The results of spot 580 market indicate the speed of adjustment to any disequilibrium towards a long-run at 130 per cent was corrected each year. The F statistics for all the entire, forward and reverse period indicates the rejection of hypothesis that the coefficients jointly equal to zero. Furthermore, the estimates of the VECM indicate the existence of bidirectional causality was observed for entire and pre period, but for the post period unidirectional causality running from futures to spot in the long- run. The residuals of VECM are used to estimate the lead-lag relationships between the spot and futures markets series by tested with Wald tests of coefficient restrictions are reported in Table 6. In most of the cases, the raw returns series can cause spurious lead-lag relation because of infrequent trading of stocks within the index portfolio, the models use spot market innovations, I s,t, and futures market innovations, I f,t . Initially, several ARMA(p,q) processes were estimated including the ARMA(2,3) model used by Stoll and Whaley (1996) and Fleming et al. (1996). However, all of these were less successful at eliminating autocorrelation than a simple AR (1) process. The higher-order ARMA models leads to low explanatory power and correlograms were observed with significant residual autocorrelation. Thus, the lead-lag relation is estimated with return innovations generated by an AR(1) process. The choice of five leads and lags is based on preliminary evidence from cross-correlation coefficients which are small and insignificant at longer leads and lags. The dependent and independent variable are the spot market and futures market innovations, respectively. The contemporaneous relationships between spot and futures market were observed with strong for the bivariate variables. In all periods, the estimated contemporaneous coefficients for S t causing on F t were significant and large. Some of the lead coefficients are significant at one per cent level and evidenced that spot market is leading the futures market. However, the relations for successive years show this lead declining. There is stronger evidence that futures lead the spot market. Even though the magnitude of the coefficients declines, the evidence suggests that futures market tend to lead price movements in the spot market. Clearly, although there is weak evidence that the spot market leads the futures market, there is stronger evidence that the stock index futures market leads the stock market. 6. Conclusion This article investigates the effect of global meltdown and volatility persistence in spot and futures market in India. The results of GARCH (1,1) model suggest the volatility persistence in spot market is due to the loss of investor‘s confidence in the value of securitized mortgages, which resulted in liquidity crisis that prompted a substantial injection of capital into commodity market. Financial speculation in commodity futures following the collapse of financial derivatives markets has tempted the investors to contribute in food, raw materials and lead to increase in oil prices. Moreover, the failure of financial giants likes Lehman Brothers, Morgan Stanley, Goldman Sachs, Tata AIG and other important institutions hit the crisis dramatically. On the other side, the Vector Error Correction Model (VECM) and Granger causality test for entire and pre period were observed with bidirectional causality between spot and futures market, but in post crisis period unidirectional causality running from futures to spot in the long-run. Thus, the returns in these two markets are largely contemporaneous, but with week evidence that 581 the spot market leads the futures market and stronger evidence that the futures market leads the spot market. This suggests that news disseminates first in the futures market and then it is transmitted to spot market. In summary, it would be seem that the comprehensive financial sector reforms like International Financial Reporting Standards (IFRS) and Basel II Accord will strengthen the financial markets to deal with the complex challenging environment. 582 REFERENCES Abhyankar, A. H. (1995), ― Return and Volatility Dynamics in the FT-SE 100 Stock Index and Stock Index Futures Markets‖, Journal of Futures Markets, Vol. 15, No. 4, pp. 457-488. Antoniou, A and P Holmes (1995): ―Futures Trading, Information and Spot Price Volatility: Evidence from FTSE -100 Stock Index Futures Contracts Using GARCH?‖ Journal of Banking and Finance, Vol: 19, No: 2, pp. 117-129. 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(1999), ―Price Discovery and Causality in the Australian Share Price Index Futures Market‖, Australian Journal of Management, Vol. 24, No. 2, pp. 97-113. 585 TABLE: 1 SUMMARY STATISTICS FOR S & P CNX NIFTY SPOT MARKET Statistics Entire Period Pre Period Post Period Mean -0.0003 0.0002 -0.0009 Standard Deviation 0.0187 0.0104 0.0243 Skewness 0.1519 0.1253 0.1868 Kurtosis 7.1618 5.4752 4.9023 Jarque – Bera 1134.84 987.53 522.33 LB (3) -0.006 (40.08) a 0.055 (17.06) a -0.018 (21.60) a LB (6) -0.089 (55.37) a 0.023 (18.54) a -0.085 (39.44) a LB (9) 0.085 (74.28) a 0.101 (37.84) a 0.081 (45.42) a Note: a Significant at the 1 % level TABLE 2: ESTIMATED RESULTS OF UNIT ROOT TEST Periods Markets ADF Test PP Test Intercept Trend & Intercept Intercept Trend & Intercept Entire Period Spot -8.480942 -8.480984 -34.86937 -34.85632 Futures -7.548679 -7.564528 -36.81742 -36.80402 Pre Period Spot -7.155411 -7.261888 -25.28199 -25.32630 Futures -6.849302 -6.932337 -27.72714 -27.75171 Post Period Spot -8.278187 -8.271532 -23.74615 -23.72875 Futures -8.454238 -8.451316 -24.58225 -24.56304 Note: ADF is the Augmented Dickey Fuller test and PP refers to Phillips-Perron test. 586 TABLE 3: GARCH (1, 1) MODEL Periods t t t u R R + + = ÷1 0 o t t t t D h u h 1 1 1 2 1 1 0 o | o o + + + = ÷ ÷ α 0 R t-1 α 0 α 1 β 1 δ 1 α 1 +β 1 Entire Period 0.0015 a 0.0737 a 0.0000 a 0.1603 a 0.8068 a 0.00017 a 0.9671 (4.0079) (2.4822) (5.1563) (9.3622) (08.0395) (3.8475) Pre Period 0.0018 a 0.0749 0.0000 a 0.1841 a 0.7571 a 0.9412 (3.9923) (1.8094) (4.5321) (7.3191) (10.0873) Post Period 0.0008 0.0612 0.0000 a 0.1322 a 0.8596 a 0.9918 (1.0380) (1.2925) (3.3496) (6.0181) (09.5368) Note: t-statistics are in the parentheses. a denote significance at the 1 % level of significance TABLE: 4 ENGLE-GRANGER COINTEGRATION TESTS FOR S&P CNX NIFTY SPOT AND FUTURES MARKETS Period Cointegration Regression CRADF Lag order Entire Period S t = (0.000674) + (-0.072081) -8.247778 a 13 F t = (0.000675) + (-0.083437) -36.94534 a 01 Pre Period S t = (0.001106) + (-0.137546) -7.866065 a 09 F t = (0.001081) + (-0.167799) -7.803951 a 09 Post Period S t = (0.000218) + (-0.036962) -8.068554 a 07 F t = (0.000279) + (-0.041637) -24.69732 a 01 Note: a denote significance at the 1 % level of significance. 587 TABLE: 5 ESTIMATES OF VECTOR ERROR CORRECTION MODEL FOR S&P CNX NIFTY SPOT AND FUTURES MARKETS Periods Entire Period Pre Period Post Period Spot Futures Spot Futures Spot Futures Constant 3.52E-06 3.14E-06 -4.86E-06 -3.55E-05 -6.97E-05 4.04E-05 (0.009) (0.005) (-0.012) (-0.054) (-0.717) (0.038) S t-1 0.1706 a -0.6103 a 0.7418 a -0.5003 a -0.0104 -0.6323 a (5.275) (-11.634) (9.766) (-3.888) (-1.584) (-8.888) S t-2 0.0787 b -0.4391 a 0.3714 a -0.3051 a -0.0074 -0.4547 a (2.570) (-8.837) (6.413) (-3.109) (-1.162) (-6.576) S t-3 -0.0213 -0.2833 a 0.0877 b -0.2589 a -0.0030 -0.2625 a (-0.779) (-6.383) (2.167) (-3.777) (-0.506) (-4.048) S t-4 0.0003 -0.2004 a -0.0228 -0.2131 a 0.0018 -0.1815 a (0.013) (-5.319) (-0.756) (-4.170) (0.359) (-3.228 ) S t-5 0.0269 -0.0841 a -0.0168 -0.0682 -0.0029 -0.0889 b (1.498) (-2.888) (-0.700) (-1.670) (-0.736) (-2.072) F t-1 -1.1460 a -0.2086 a -2.0028 a -0.1699 -1.2764 a -0.6510 (-27.687) (-3.107) (-22.080) (-1.105) (-35.575) (-1.679) F t-2 -0.9575 a -0.1514 b -1.4630 a -0.1359 -1.2791 a -0.5781 (-23.605) (-2.302) (-16.565) (-0.908) (-35.631) (-1.491) F t-3 -0.8186 a -0.0656 -0.9542 a -0.1395 -1.2736 a -0.4857 (-22.925) (-1.134) (-12.857) (-1.109) (-35.471) (-1.252) F t-4 -0.7631 a 0.0030 -0.5747 a -0.0943 -1.2751 a -0.4287 (-25.234) (0.062) (-10.568) (-1.024) (-35.866) (-1.116) F t-5 -0.0889 a 0.0399 -0.2192 a -0.0620 -0.3401 a -0.3690 (-3.569) (0.988) (-6.824) (-1.138) (-9.570) (-0.961) ECM t-1 -1.1840 a 0.7045 a -2.1096 a 0.7208 a -1.3084 a 0.2525 (-12.445) (10.070) (-10.478) (9.533) (-13.299) (0.630) F-Statistics 365.421 a 103.268 a 200.337 a 57.294 a 102.35 0 a 47.594 a Note: t-statistics are in the parentheses. a and b denote significance at the 1 % and 5 % levels, respectively. 588 TABLE: 6 LEAD – LAG RELATIONSHIP BETWEEN S & P CNX NIFTY FUTURES AND SPOT MARKET VARIABLES Periods Entire Period Pre Period Post Period Spot Futures Spot Futures Spot Futures Constant -2.14E-05 1.47E-05 -0.0001 3.17E-05 0.0001 -6.23E-05 (-0.062) (0.025) (-0.455) (0.052) (0.970) (-0.061) S t-1 -0.0961 a 0.0441 -0.4231 a 0.1373 b -0.4241 a -0.3884 (-3.654) (1.023) (-11.113) (2.256) (-9.522) (-0.900) S t-2 -0.2798 a 0.1433 a -0.5487 a 0.1220 -0.2173 a 0.3128 (-10.846) (3.387) (-13.415) (1.865) (-4.632) (0.688) S t-3 -0.3298 a 0.0332 -0.5036 a -0.0188 -0.0923 b 0.1705 (-12.373) (0.761) (-11.419) (-0.266) (-2.109) (0.401) S t-4 -0.0386 b 0.0021 -0.3416 a -0.0108 0.0064 -0.0040 (-2.051) (0.068) (-7.761) (-0.153) (1.358) (-0.086) S t-5 -0.1259 a 0.0272 -0.2360 a 0.0984 -0.0436 a 0.0051 (-6.679) (0.882) (-5.646) (1.472) (-9.707) (0.117) F t-1 0.0082 0.0013 0.1042 a -0.0132 0.0167 a 0.0301 (0.493) (0.048) (4.352) (-0.346) (3.633) (0.674) F t-2 0.1937 a -0.0367 0.5913 a -0.0232 0.0053 -0.0249 (11.667) (-1.348) (24.591) (-0.603) (1.146) (-0.555) F t-3 0.1516 a 0.0003 0.5856 a -0.0418 0.0087 0.0016 (8.773) (0.013) (17.793) (-0.794) (1.910) (0.036) F t-4 0.0709 a -0.0257 0.4841 a -0.0070 -0.0045 -0.0376 (4.065) (-0.901) (12.437) (-0.113) (-1.070) (-0.924) F t-5 0.7162 a -0.0060 0.4769 a -0.0373 0.9344 a -0.0092 (40.880) (-0.210) (11.589) (-0.567) (22.130) (-0.226) H 0 : all lead coefficients are zero χ 2 (p - Value) 55.87 (0.000) 45.82 (0.000) 36.82 (0.000) F (p - Value) 7.45 (0.000) 5.81 (0.000) 4.24 (0.000) H 1 : all lead coefficients are zero χ 2 (p - Value) 1028.53 (0.000) 451.16 (0.000) 367.87 (0.000) F (p - Value) 169.25 (0.000) 89.36 (0.000) 52.42 (0.000) Note: t-statistics are in the parentheses. a and b denote significance at the 1 % and 5 % levels, respectively. 589 CONSUMER PERCEPTION OF CORPORATE SOCIAL RESPONSIBILITY: A CROSS-CULTURAL COMPARISON IN INDONESIA AND TAIWAN Maryono Department of Bio-industry and Agribusiness Administration, National ChiaYi University, No. 580 Sinmin Rd., Chiayi City 600, Taiwan (R.O.C.) e-mail:
[email protected] Jun-Yen Lee Department of Bio-industry and Agribusiness Administration, National ChiaYi University, No. 580 Sinmin Rd., Chiayi City 600, Taiwan (R.O.C.) e-mail:
[email protected] ABSTRACT Study concerning corporate social responsibility (CSR) was increasing recently. Most of them conducted in the U.S. and the Europe but relatively little focuses on Asia. This study adopts a multidimensional and cross-cultural perspective on the analysis of consumer perceptions toward CSR in two of Asian countries: Indonesia and Taiwan. This study is to analyze whether consumers in two countries support firms that are socially responsible and to evaluate the different perception of CSR dimension due to culture difference. The findings suggest that both Indonesian and Taiwanese consumers support the CSR in business. A multi- group second-order CFA was conducted and revealed that dimension of CSR was variants between two countries. Keywords: corporate social responsibilities, cross-cultural study, Indonesia, Taiwan, multi- group second-order CFA. INTRODUCTION In last decade, study concerning corporate social responsibility (CSR) was in the increase, especially from consumers‘ perspective. Moreover, the idea that socially responsible behavior generates positive consequences for the business is increasingly accepted (Maignan and Farrell, 2001; Brown and Dacin, 1997; Smith, 2003; Bhattacharya and Sen, 2004; Maignan, 2001; Singh et.al., 2007; Garcia de los Salamos et.al., 2005; Luo and Bhattacharya, 2006; and Becker-Olsen et.al., 2006). Most of them, however, conducted in the Western countries like the U.S. and the Europe but relatively little focuses on Asia. On the other hand, the CSR issues also going popular in the Asian countries recently, i.e. Taiwan and Indonesia (Chapple and Moon, 2005; Mirfazli, 2008; Lin, 2009; Chang, 2008; and Ip, 2008). In December 2009, the Department of Investment Services, Ministry of Economic Affairs of Taiwan held a CSR award 2009 to encourage industries to release 590 sustainability reports and improve the performance of corporate social responsibility and sustainable development. The companies participating increased by 37.5% compared to 2008. Taiwan's corporations used to be conservative, choosing not to publish their environmental or sustainability reports; however, more and more companies have been willing to share this business information over the last three years (The China Post, December 4, 2009). Also, multinational companies (MNCs) operating in Indonesia have been fostering the adoption of CSR policies (Koestoer, 2007; Chapple and Moon, 2005). Based on Carroll (1991, 1979) CSR has four dimensions of responsibility firms to society; economic, legal, ethic, and philanthropic. These four dimensions of responsibility are actually domains in which managers can operate. A manager has discretion to choose which type of responsibility to operate based on their orientation. The managerial perspective of what is or is not important may not be congruent with consumer perceptions. Burton et al., (2000) gives an example, a business executive may believe that all four dimensions of responsibility are important in absolute terms. When he makes a decision, however, he must weigh the relative importance of each domain. On the other hand, consumers may have their own perceptions and expectations of CSR especially in the level of importance of each dimension. Further, Burton, et al., (2000) found that there is a relationship between culture and CSR perception. Different cultures will use different relative weightings; in addition, different societies may promote different relative weightings. Different cultures may emphasize different values; what is important to one culture at one time may not be important in another culture. Here, there is a need to investigate the consumer perception of CSR. This is relevant to avoid obvious misunderstanding between what the companies do and what the consumers expect. Despite a considerable extension of the related research there is no empirical study from the consumer side that explains whether or not consumers in Indonesia or Taiwan are influenced by the company‘s CSR initiatives. Does the CSR initiative influence them when they were shopping? Do consumers‘ perceptions of CSR vary between the two countries due to cultural difference? This research tries to address these fundamental questions. LITERATURE REVIEW Development of CSR Over the past several decades, CSR has grown from a narrow and often marginalized notion into a complex and multifaceted concept, one which is increasingly central to much of today‘s corporate decision making. The main point of CSR was the idea about what it meant for business to make a positive contribution to the rest of society, since business has both positive and negative impacts on society and on the environment (Blowfield and Murray, 2008). The meaning of CSR is becoming more and more expanded as well as becoming standardized. After several decades of research on CSR, McWilliams et al. (2006) still concluded that there is a no strong consensus on a definition for CSR. Carroll (1991, 1979) pointed out that corporate social responsibility can be categorized into four dimensions: economic, legal, ethical, and philanthropic. Economic responsibility is a responsibility to produce goods and service that society wants and to sell them at a profit. Legal responsibilities correspond to society‘s expectations to see business meet their economic duty within the framework of the legal requirement. Ethical responsibilities require that business abides by established norms defining appropriate behavior. Philanthropic responsibility is defined as reflecting on the common desire to see business get actively involved in the betterment of society. These responsibilities are typified in a pyramid form 591 with the more basic responsibilities (economic and legal) at the base, while the more advanced responsibilities (ethical and philanthropic) are at the pinnacle. The pyramid analogy also implies that the basic responsibilities support the more advanced ones (Ramasamy and Yeung, 2009). CSR and Consumer Behavior Some authors have observed that a large number of consumers claimed to be more willing to buy products from companies involved in social causes (Garcia de los Salmones et al, 2005). Maignan et al.,(1999) stated that many proactive corporations monitor customer satisfaction closely and as a result individuals may express their trust and appreciation of their CSR efforts by continuing to buy their products. Consumers are interested in the social behavior of firms, and this behavior influences consumers‘ purchasing decisions. This study examined consumers‘ perceptions on CSR and willingness to support responsible business from two Asian countries, Indonesia and Taiwan. Even though the two countries are located in Asia, they have differences on several issues that make their comparison interesting. Indonesia and Taiwan has differences on the degree of economic development. For instance, the IMF provided the list of countries‘ positions in the world based on the GDP per capita in 2008. The position of Taiwan and Indonesia were 42 th (US$ 16.987) and 116 th (US$ 2.239), respectively (IMF, 2009). Ramasamy and Yeung (2009) stated that the degree of economic and social development migrates consumers‘ perceptions of CSR and in developing countries where the average income is low, consumers may underestimate their role in the market. The level of economic development influences the extent of CSR awareness and the degree to which consumers demand CSR from firms. Therefore, the first hypothesis is: H1: The Taiwanese consumer is more supportive of socially responsible business when shopping than Indonesian. Prior study confirmed that consumers were able to distinguish the dimension of CSR (economic, legal, ethics, and philanthropic) (Maignan (2001); Burton et al., (2000), and Ramasamy and Yeung (2009). Consumer perception of CSR is defined as the ability of the consumer to differentiate between corporate economic responsibilities on the one hand and corporate legal, ethical, and philanthropic responsibilities on the other (Burton et al., 2009). Accordingly, we suggested the following hypotheses: H2: Consumers in Indonesia and Taiwan are able to distinguish between the dimensions of corporate social responsibility: economic, legal, ethical, and philanthropic. CSR and Cross-cultural Perspectives Due to the globalization and internationalization which is a reality today, there are no longer any obstacles for companies to expand their business in other countries which have different cultures. Therefore, understanding cross-cultural differences is of great important for business. Hoecklin (1995) and Burton et al.(2000) indicated that culture has been defined in many ways, yet it is principally viewed as the fundamental system of meanings shared by members of a specific society. Burton continued that different cultures will emphasize different values; what is important to one culture at one time may not be important to another culture, or even to the first culture at some time in the future. 592 Maignan (2001) found that different cultures will result in different perceptions. She found that U.S. consumers valued corporate economic responsibilities very highly, while French and German consumers were most concerned about business conforming with legal and ethical standards. These findings illustrate different dimensions of French and German national ideologies as depicted by Lodge (1990). On the other hand, the individualistic nature of the U.S. ideology comes out clearly in the study results since economic responsibilities were rated as most important. Ramasamy and Yeung (2009) studied Chinese consumers‘ perceptions toward CSR in Hong Kong and Shanghai. They found the importance placed by Chinese consumers on four responsibilities of firm-economic, legal, ethical, and philanthropic- that economic responsibilities are the most important while philanthropic responsibilities are of least importance. Even though, they are similar to Mainland China and Hong Kong with regard to their very large Chinese populations, Taiwan is uniquely placed because it holds on to traditional Confucian values. To ensure a harmonious society, moderate behavior by individuals is emphasized (Hsieh and Scammon, 1993). Therefore, we argue that Taiwan consumers have their own evaluation toward CSR that is different from Chinese PRC consumers. Kemp (2001) indicates that a lack of a social welfare system in Indonesia means that workers depend on their salaries as the sole sources of income leading them to accept substandard working environmental degradation as ―fate‖. In this situation, consumers may tend to emphasize the economic responsibilities of business, as this will secure jobs and income. From this condition, the following hypotheses are advanced: H3: CSR dimensions vary between the two countries. H4: Consumers in Indonesia allocate greater importance to corporate economic responsibilities than legal, ethical, and philanthropic responsibilities. H5: Consumers in Taiwan allocate less importance to corporate economic responsibilities than to corporate legal, ethical, and philanthropic responsibilities. METHODS Sampling and Data Collection Data were collected with convenience sampling by questionnaires to employees of financial institution (banks and insurance companies), manufacturing companies, and students in both countries; Indonesia and Taiwan between July – September 2009. A total of 400 questionnaires, 200 questionnaires for each country were distributed to students and contacts working in banks, insurance, and manufacturing companies. The contacts working in insurances companies, banks, and manufacturing companies distributed the questionnaires to their colleagues at all levels of the organizations and departments as far as possible. They were also responsible for collecting and returning completed questionnaires back to the researchers. In Taiwan, questionnaires were distributed in one insurance company located in Taichong, three banks located in Chiayi city, several manufacturing companies located in Chiayi county and students of the National Chiayi University. In Indonesia, questionnaires were distributed in two of banks in Bogor and Bandung, two insurance companies in Jakarta, three manufacturing companies in Bekasi city, and students at Bogor Agricultural University in Bogor city. A total of 189 Indonesia and 185 Taiwan questionnaires were usable. 593 The frequencies of respondents provided statistics describing different types of variables. Indonesian respondent ratio of male was 46.0% and Taiwan was 51.4%. In terms of age groups, Indonesian respondents 82.1% were under 30 years old, while for Taiwan respondents 75.7 percent were more than 30 years old. Further, more than half (66.10 percent) Indonesian and (69.2 percent) Taiwanise respondents held a college or undergraduate degree. Indonesia respondents‘ occupations, 31.2 percent were working in financial institution, 36.5 percent in manufacturing companies, and 32.3 percent were students. While for Taiwanese respondent‘s occupations, 47.0 percent, 20.0 percent, and 33.9 percent are working in financial institution, manufacturing companies, or are students respectively. In addition, 90.5 percent of Indonesian respondents had worked for less than 10 years, while for Taiwan respondents only 72.4 percent had done so. In Indonesian, there were 57.7 percent in staff positions, 9.0 percent were supervisors, and 8.5 percent were managers, while for Taiwan 48.1 percent, 21.1 percent, and 0.5 percent were staff, supervisors, and managers respectively. There were 42.9 percent of Indonesia respondents who had incomes lower than US$.200 and 38.1 percent between US$.400-$.600. Taiwan respondents had higher incomes than Indonesia, it was 42.2 percent higher than US$.600 and 32.4 percent between US$.600-$.1.200. Measurement To measure consumers‘ support intentions and evaluation toward CSR dimensions of businesses, we used a scale tested in the study conducted by (Maignan, 2001) and Ramasamy and Yeung (2009) which included 5 items of support intention and 16 items of CSR evaluation (four per each dimension) based on the statement: ―I believe that business must….‖. Each item provides a 5-point scale from 1 representing strongly agree to 5 representing strongly disagree. To measure value and culture differences, the questionnaire included Hofstede‘s Values Survey Module 1994 (VSM 94), a 28-item (four questions per dimension). The 28 content questions allow index scores to be calculated on seven dimensions of national value systems as components of national cultures: Power Distance, Individualism, Masculinity, Uncertainty Avoidance, and Long-term Orientation, Indulgence versus restrait, and Monumentalism. All content questions are scored on five-point scales (1-2-3-4-5). A questionnaire that included the support intention items, evaluation of CSR dimension, value evaluation, and demographic was developed in both Indonesian and Chinese languages. A pilot test was conducted to avoid misunderstanding and misinterpretation involving 30 students from National Chiayi University and 30 Indonesian students who studied in Taiwan. Only minor adjustments were observed and made. RESULTS AND DISCUSSION This section presents the finding of research‘s hypothesis tests. The first section describes the analysis of support intention. The second section describes the consumers evaluation of the social responsibilities of business. The last section describes the value and cultural differences. Support Intention 594 Support intention were measured based on five items instrument as discussed. Reliability of support intention measurement was assessed by Cronbach‘s Alpha. Reliability is an assessment of the degree of consistency between multiple measurements of a variable (Hair Jr et al., 2006). The Cronbach‘s Alpha estimate was 0.71 for the two samples together, and 0.59 and 0.79 for Indonesian and Taiwan respondents respectively. The results of the means of variables, respondents tended to score between 1 and 2 on all items. The average means of consumer support of responsible business were 2.006 and 1.985 for Taiwanese and Indonesian respectively. This indicates that both respondents in Indonesian and Taiwanese support CSR in businesses. An analysis of covariance (ANCOVA), then, was used to test the mean differences of consumer support between Taiwanese and Indonesian respondents with education, work experience, job position, occupation and income as covariates. This means the test of hypothesis was strengthened by adjusting for the relationship between consumer support of responsible business and these variables. The results, however, show that none of these variables was significant. In other words, there is no differences level of support of responsible business between these variables. Furthermore, based on the LSD test and strengthened by the T-test revealed that there was no differences in level of support of responsible business between Taiwanese and Indonesian consumers. Consumer evaluation of CSR Dimension of Businesses Reliability and Validity The reliability and validity of the construct (CSR dimensions) is assessed using a confirmatory factor analysis with an estimation for maximum likelihood in AMOS 5.0, separately for each country. Firstly the goodness of fit of the model is observed to be close to its reference value (Hair et al., 2006). A significant X 2 statistic indicates its fit is good. X 2 for Indonesian respondents were 176.644 with degrees of freedom 98 and significance at 0.000. For Taiwanese respondents are X 2 = 198.287 (p = 0.000), df = 98. Other measures of fit are also applied include GFI, AGFI, NFI, CFI, and RMSEA. The recommended acceptance of a good fit to a model requires that the obtained GFI and AGFI, NFI, CFI values should be greater than or equal to .90. In addition to that, an acceptable value of RMSEA should range from .05 to .08 (Hair et al., 2006). Fit statistics of CFA results depicted in Table 1 indicate a good fit for the proposed model. Reliability measures of the degree to which a set of indicators of latent variables is internally consistent in their measurements. In this research, variables of all dimension of CSR were tested reliability with item-to-total correlation and Cronbach‘s alpha. From Table 1 we can see that the Cronbach‘s alpha estimate is higher than 0.6. Accordingly, the outcomes of this analysis suggest a high profile of internal consistency for each item of CSR dimension. Validity is the extent to which a scale or set of measures accurately represents the concept of the study. Factor loadings of all items confirming a strong convergent validity in which it exceeded the recommended level 0.5 but one. TABLE 1 RELIABILITY AND VALIDITY OF CSR CONSTRUCT Taiwan Indonesia Construct Scale Internal consistency Convergent Validity Internal consistency Convergent Validity 595 Cronbach Alfa Item-to-total correlation Std loadings Cronbach Alfa Item-to- total correlation Std loadings Economic E1 0.621 .393 0.503 0.721 .500 0.549 E2 .453 0.643 .585 0.634 E3 .375 0.503 .501 0.691 E4 .421 0.552 .529 0.718 Legal L1 0.793 .678 0.679 0.727 .455 0.557 L2 .540 0.539 .574 0.726 L3 .831 0.831 .482 0.579 L4 .767 0.769 .614 0.739 Ethic Et1 0.832 .537 0.572 0.651 .576 0.833 Et2 .731 0.799 .550 0.708 Et3 .737 0.853 .414 0.552 Et4 .671 0.784 .307 0.348 Philan- Phi1 0.816 .683 0.804 0.827 .697 0.756 thropic Phi2 .719 0.866 .634 0.694 Phi3 .708 0.777 .700 0.813 Phi4 .476 0.502 .612 0.718 Fit Χ 2 (d.f=98) = 176.644 GFI = 0.899 Χ 2 (d.f=98)= 198.287 GFI = 0.881 P = 0.000 AGFI = 0.860 P = 0.000 AGFI = 0.834 RMR = 0.033 NFI = 0.861 RMR = 0.040 NFI = 0.813 RMSEA = 0.066 CFI = 0.931 RMSEA = 0.074 CFI = 0.893 Discriminant validity is the extent to which a constructs is truly distinct from other constructs. The discriminant validity was assessed for each construct by examining the constructs in sets of two. For example, ―economic‖ was tested against ―legal‖ to ensure that these two factors did not measure the same thing. Then the researcher performed another test on ―economic‖ and ―ethic‖ and so forth, until every pair of constructs was tested. Discriminant validity was then assessed by comparing correlation coefficients (phis) plus and/or minus two standard errors. Constructs have discriminant validity if each phi between two constructs plus or minus two standard errors does not include a plus/minus of one or above (Macintosh and Lockshin, 1997). Calculated value between Taiwanese and Indonesian respondents verified the discriminant validity of the construct. Therefore, the hypothesis 2 is supported, that Taiwanese and Indonesian respondents were able to distinguish four dimension of CSR (economic, legal, ethic, and philanthropic). Multi Group Second-order CFA The next analysis was second-order CFA which involved the evaluation of the relationship between the four dimensions of CSR (economic, legal, ethic, and philanthropic) and multi- dimesionality of CSR from the consumer‘s perspective and to determine the weight of each dimension in the global CSR constructs. In other words, the structure model examined how the four dimensions contributed to an overall CSR construct. A 16-item second-order CFA was estimated for Indonesian and Taiwanese respondents separately. Fit indices indicated an acceptable fitting model for both groups: χ 2 (d.f.=100)= 198.815, P=0.000, RMR= 0.040, RMSEA= 0.072, GFI= 0.880, AGFI= 0.837, NFI= 0.812, CFI= 0.895, IFI= 0.897 for Indonesian group, and χ 2 (d.f.=100)= 187.179, P=0.000, RMR= 596 0.036, RMSEA= 0.069, GFI= 0.895, AGFI= 0.857, NFI= 0.852, CFI= 0.924, IFI= 0.925 for Taiwanese group. The second-order CFA are presented in Figure 2A and 2B. Then, Multi group second-order CFA were estimated in order to verify that the specified CSR model operates equivalently across the two independent samples, following Byrne (2001). In other words, a model in which the data for the two groups were analyzed simultaneously estimated. Fit indices were used to assess model-data fit are root mean square error of approximation (RMSEA) proposed by Steiger and Lind (1980) and comparative fit index (CFI) proposed by Bentler (1980). RMSEA below 0.050 suggests a good model-data fit; between 0.050 and 0.100 it suggests an acceptable model-data fit. The CFI indices greater than 0.90 suggest a good model-data fit and CFI indices greater than 0.80 suggest adequate model-data fit. The fit of the simultaneous model was good: χ 2 (d.f.= 196)= 361.922, P=0.000, RMR= 0.042, RMSEA= 0.050, CFI= 0.905. Also, a multi group second-order CFA model in which the factor loadings (λs), the factor variances/ covariances (ϕs), and the structural regression paths (γs, βs) were constrained to be equal across the groups was estimated. Results from the estimation from this model yielded a good fit: χ 2 (d.f.= 234)= 476.235, P=0.000, RMR= 0.065, RMSEA= 0.056, CFI= 0.862. Provided with findings of a significant difference in χ 2 value between the two models (Δχ 2 = 114.313, Δdf= 38, p < 0.005) the hypothesis on an invariant pattern of factor loading, factor variances/ covariances, and structural regression paths between the two groups was rejected. In other words, the factor loadings, factor variances/ covariances, and structural regression paths between the two groups were different as shown in Table 2. TABLE 2 TEST FOR MEASUREMENT INVARIANCE ACROSS INDONESIAN AND TAIWANESE Model Groups χ 2 (df) Δχ2 (Δdf) RMSEA CFI Hypothesized model Indonesia, Taiwan 361.922 (196) - 0.050 0.905 Factor loadings, variances/ covariances, structural regression paths constrained equal Indonesia, Taiwan 476.235 (234) 114.313 (38)* 0.056 0.862 Note: Δχ2: Difference value in χ2 values between models, Δdf: difference in number of degrees of freedom between models, * p < 0.00 597 FIGURE 1. SECOND-ORDER CFA FOR INDONESIAN FIGURE 2. SECOND-ORDER CFA FOR TAIWANESE .52 1.00 .68 .39 CSR PHILAN- THROPIC ETHIC LEGAL ECONOMIC Eco1 Eco2 Eco3 Eco4 Leg1 Leg2 Leg3 Leg4 Eth1 Eth2 Eth3 Eth4 Phi1 Phi2 Phi3 Phi4 .54 .64 .70 .72 .52 .78 .60 .69 .81 .68 .61 .35 .85 .76 .69 .58 .52 .92 .78 .64 CSR PHILAN- THROPIC ETHIC LEGAL ECONOMIC Eco1 Eco2 Eco3 Eco4 Leg1 Leg2 Leg3 Leg4 Eth1 Eth2 Eth3 Eth4 Phi1 Phi2 Phi3 Phi4 .43 .67 .54 .53 .68 .74 .85 .56 .57 .79 .86 .79 .82 .85 .78 .50 598 These findings revealed that Taiwanese respondents give the rank of importance as legal, ethics, philanthropic, and economic, respectively. While, Indonesian respondents give the rank of importance of CSR dimension as legal, ethics, economic, and philanthropic. The differences between Taiwan and Indonesia was, Taiwanese respondents give the economic dimension as the least important of the CSR dimension, while, Indonesian respondent indicated philanthropic. The evidence implies that hypotheses 3 (consumer in Indonesia will allocate more importance to economic dimension) is rejected. However, this finding supports hypotheses 4 that consumers in Taiwan allocate less importance to economic dimension than legal, ethic, and philanthropic. Therefore, the different perceptions between Taiwanese and Indonesian respondents toward CSR dimension may be explained by the cultural differences. CULTURAL AND VALUE EVALUATION The final part of the instrument was Hofstede‘s Values Survey Module 2008 (VSM 08) to compare the value and cultural differences between the two countries. The five dimensions of national value systems as components of national cultures are: Power Distance, Individualism, Masculinity, Uncertainty Avoidance, and Long-term Orientation, Indulgence versus restrait, and Monumentalism. The means score and differences between Taiwanese and Indonesian respondent of VSM 08 were provided in Table 3. All of Hofstede‘s culture items, show that between Taiwanese and Indonesian respondents they are significantly different, but individualism. Indoneisia tends to have a higher level of power distance (more acceptance of hierarchies), masculinity, indulgence versus restraint and monumentalism, a lower level on uncertainty avoidance and a long-term orientation. The two countries were basically similar on individualism (more concern with the group), even though Taiwan was higher than Indonesia. TABLE 3 MEAN SCORES AND PAIRED SAMPLES TEST OF HOFSTADE’S CULTURAL DIMENSION Dimension Indonesia Taiwan Sig (2tailed) Power distance index 69.21 45.38 0.000** Individualism 48.71 50.22 0.658 Masculinity 50.94 39.05 0.060* Uncertainty avoidance 15.59 44.76 0.000*** Long-term orientation 50.73 99.40 0.000*** Indulgence versus restrait 99.06 86.73 0.034** Monumentalism 106.35 -0.93 0.000*** *, **, *** Refers to significance at the 90, 95, and 99% confidence level CONCLUSION Based on the results of this empirical study, a number of conclusions can be drawn. The first conclusion is that the respondents both in Taiwan and Indonesia are willing to support responsible business when they are shopping. The empirical results of this study, however, show that even though Taiwan and Indonesia have a number of differences in culture and economic development but that consumers in Taiwan and in Indonesia give the same level of support to socially responsible business. 599 Second, the results of this study also reveal that consumers in Indonesia and Taiwan are able to distinguish the four dimensions (economic, legal, ethic, and philanthropic). Moreover, the CSR construct are at variance between consumers in Taiwan and Indonesia. The results show that Indonesian respondents ranked the legal dimension as the most important followed by ethic, economic, and philanthropic. Fourth, as a result of this research it can be found that consumers in Taiwan ranked the economic dimension as the least important. The implication for business is straightforward: investing in CSR is an important strategic task that attract consumers to their products The findings of this study indicate that CSR is important in the business activities from consumer perspectives in both Taiwan and Indonesia. These findings confirm the appropriateness of CSR as an instrument to market their businesses to consumers. Although one could argue that the CSR issue is only relevant to developed economies, however this finding reveals that CSR issues have also gained prominence in emerging countries. These findings confirm that both Taiwanese and Indonesian consumers are mostly concerned about business conforming to the law and regulations and also conforming o social norms, not about business achieving high levels of economic performance or philanthropy. This study suffered from a small sample size and a sample selection that could not to be representative of the larger populations of either Indonesia and Taiwan. 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I consider the ethical reputation of business when I shopping 3. I avoid buying products from companies that have engaged in immoral actions 4. I would pay more to buy the product of a company that shows caring for well-being of our society 5. If the price and quality of two products are the same, I would buy from the firm that has a socially responsible reputation. Evaluation of CSR Dimensions I believe that businesses must: 1. Maximize profits 2. Control their production costs strictly 3. Plan for their long term success 4. Always improve economic performance 5. Ensure that their employees act within the standards defined by law 6. Refrain from putting aside their contractual obligations 7. Refrain from bending the law even it this helps improve performance 8. Always submit to the principles defined by the regulatory system 9. Permit ethical concerns to negatively affect economic performance 10. Ensure that the respect of ethical principles has priority over economic performance 11. Be committed to well-defined ethics principles 12. Avoid compromising ethical standards in order to achieve corporate goals. 13. Help solve social problems 14. Participated in the management of public affairs 15. Allocate some of their resources to philanthropic activities 16. Play a role in our society that goes beyond the mere generation of profits. 603 THE EFFECTS OF SECURITY AND PRIVACY INFORMATION ON TRUST & TRUSTWORTHINESS AND LOYALTY IN ONLINE MARKETING IN MALAYSIA Hamed Armesh Multimedia Univesity, Malaysia
[email protected] Davoud Nikbin Universiti Sains Malaysia, Malaysia Solmohammad Bastam Multimedia Univesity, Malaysia ABSTRACT The internet is a medium that is soaring in popularity in almost every facet of the world and is used for a myriad of reasons by individuals, governments, universities and businesses. As far as businesses are concerned, the internet has been subject to a variety of experimentations that seeks to determine the viability of using it to improve business practices in various industries including in the computer industry in Malaysia. One particular aspect of business is that the internet marketing has a great impact on the computer industry in Malaysia. The purpose of this research is to investigate the effects of security and privacy information on trust, trustworthiness and loyalty in online marketing. Data were gathered from 104 respondents who were literate Malaysian and foreigners in Malaysia that were able to read and write and hence capable of using the internet and its facilities. The results showed that there is a significant correlation between trust ,trustworthiness and security and privacy information. The results also revealed that there was a significant correlation between loyalty in online marketing and trust and trustworthiness. Keywords: Loyalty, Customer Satisfaction, Customer Trust, Customer Behavior, Computer Industry/Computer Related Product. INTRODUCTION The growth of the internet has led to a serious mass of consumers and firms participating in a global online market or e-commerce. Internet has been used as a commercial medium for transactions across the borderless world in a computer-mediated environment. The rapid growth of internet usage has transformed its function beyond just as a medium of communication to a brand new market arena (Ricciuti, 1995). The dramatic increase in internet and the growth of its usage have facilitated the development of electronic commerce, which is described as the movement of buying and selling, or the trading of products, service and information between and among organizations and individuals all the way through computer networks including the internet (Laudon & Traver, 2001). When investing in online/internet marketing, strategic thinking will bring the best rewards (Scanlon, 2009). 604 The major revolution is the internet, which is used for marketing products and services. According to a statement from e- Gain Communication an approximate 6.6 billion USD worth of merchandise are currently existing on the Internet in online marketing for more than 200 million users. 35 million are assumed to be involved actively in the online marketing world. This represents a vast market for the online ventures by business organizations and the participation of web users exponentially. Despite this, online sales or online marketing continue to develop as internet-based businesses but have become more complex, however, many users stay involved in online shopping. Understanding possible markets is thus important for businesses investing in electronic commerce. Amichai-Hamburger (2002) indicated that the behavior of internet users plays a significant role in their online behavior. Hills and Argyle (2003) reached a similar viewpoint. They found that individual internet use correlates with individual personality differences. Kotler (2003) asserted that personal factors are the main persuader of buyer behavior. Thus, understanding the personality differences between these two groups (internet shoppers or online purchasers and non-internet shoppers or non-online purchasers) is really important to businesses. Understanding the personality of potential online customers can help businesses accurately target prospective markets. Business organizations in the computer industry are facing increasingly competitive difficulties domestically and internationally. What these business organizations (computer industry) need is a new and innovative way of marketing their services to the world and to specific country such as Malaysia. Computer industries need a new method for marketing that is radically different from traditional marketing methodologies that have been used in the past, as traditional marketing methods are now starting to become obsolete. These companies (computer industries) are facing difficulties in using traditional marketing tools and are in need of something more effective and far reaching. This research aims to provide answers to these problems by examining the positive and negative impacts of internet of marketing in Malaysia and also the consumer shopping behaviors online then determine the viability of business organizations in the computer industry in utilizing the internet as their marketing tool of choice. LITERATURE REVIEW Security Kalakota and Whinston (1996) define a security threat as a circumstance, condition, or event with the potential to cause economic hardship to data or network resources in the form of destruction, disclosure, modification of data, denial of service, and fraud, waste, and abuse. Despite the fact that security positively influences intention to purchase online (Ranganathan & Ganapathy 2002; Salisbury et al., 1998), it remains one of the major concerns (Kiely 1997; Mardesich 1999; Mayer et al., 1995). Many consumers are still reluctant to release payment card information to online merchants, fearing a loss of control over their accounts. Merchants and financial institutions, in turn, are concerned about the costs associated with online charge backs and fraud. To alleviate customers‘ fears, many B2C Websites offer alternate forms of payment (e.g. telephone ordering) and/or accounts with ID‘s and passwords (Ranganathan & Ganapathy 2002). Bélanger et al., (2002) found that the presence of security features on an e- commerce site was important to consumers, and discuss how consumers‘ security concerns may be addressed by similar technology protections as those of the business, such as encryption and authentication. In this study, the features evaluated within the attribute of security include: (1) whether the site provides encryption, (2) whether the site requires the user to set up an account with an ID and password, and (3) whether a confirmation screen is displayed after the completion of the purchase to ensure accuracy. Privacy Privacy in e-commerce is defined as the willingness to share information over the Internet that allows for the conclusion of purchases (Belanger et al. 2002). B2C Web sites gather information about visitors via explicit modes (e.g. surveys) and implicit means (e.g. cookies) (Patterson et al. 1997), providing the necessary data for decision making on marketing, advertising, and products. However, many users have concerns over potential misuse of personal information (Brown & Muchira, 2004; Hair et al., 1995; Ranganathan & Ganapathy, 2002; Torkzadeh & Dhillon, 2002). For example, a Business Week/Harris poll of 999 consumers in 1998 revealed that privacy was the biggest obstacle preventing them from using Websites, above the issue of cost, ease of use, and unsolicited marketing (Green et al. 1998). An IBM Multi-National Consumer Privacy survey in 1999 showed that 80 percent of the U.S. respondents felt that they had lost all 605 control over how personal information is collected and used by companies. Seventy-eight percent had refused to give information because they thought it was inappropriate in the circumstance, and 54 percent had decided not to purchase because of concerns over the use of their information collected during the transaction (Belanger et al., 2002). A study by Forrester Research supports these findings, showing that two-thirds of consumers are worried about protecting personal information online (Branscum, 2000). To address issues of privacy, many Websites display privacy policies (McGinity, 2000). Also, independent companies (e.g. TRUSTe) can verify, audit, and certify privacy policies (Ranganathan & Ganapathy, 2002). In this study, the features evaluated within the attribute of privacy are: (1) the use of a privacy statement, (2) the merchant's policy on selling customer information to third parties, and (3) the use of cookies to collect personal information. Trust and Trustworthiness Trust is the willingness to rely on an exchange partner in whom one has confidence (Prasarnphanich, 2007). Trust consists of two distinct dimensions: credibility and benevolence (Prasarnphanich, 2007). Credibility refers to the extent to which the buyer or supplier believes that the other party has the required expertise to perform the job effectively and reliably (i.e., an ability of the partner to deliver as promised). Benevolence refers to the extent to which the buyer is genuinely interested in the other partner‘s welfare and motives to seek joint gain (Prasarnphanich, 2007). This benevolence dimension is consistent with the issue of privacy and security concerns that vendors do their best efforts to protect customers‘ personal information and prevent any personal losses due to their interaction with the vendors (Prasarnphanich, 2007). The benevolence dimension of trust can exist even when the objective credibility of vendors is less than perfect. For example, customers might feel that the vendor is still concerned with their personal welfare, even though the vendor‘s services are somewhat unreliable (Prasarnphanich, 2007). Shopping factors focus on customers‘ feelings and perceptions during and after the shopping experience. Factors determining this include convenience, trust and trustworthiness of Web merchants, and delivery time (Bélanger et al., 2002; Keeney, 1999; Nielsen, 2000 Patterson et al., 1997; Torkzadeh & Dhillon 2002). The prototypical online consumer leads a wired lifestyle and is time starved, suggesting that online shoppers may do so to save time (Bellman et al., 1999). This indicates that the overall convenience of the shopping experience is very important as well as the amount of time it takes for the product to be received. Trust is of importance during the actual shopping experience because if the consumer does not trust the merchant to make good on their purchase so a transaction will not take place. Three features of each attribute (convenience, trust, and delivery) will be evaluated using a conjoint analysis to get a preferred feature within each attribute as well as determining an overall ranking of each attribute, including an overall importance score of each attributes. Customer Loyalty Zeithaml (2000) states that previous studies viewed customer loyalty as being either behavioral or attitudinal. The behavioral approach is that customers are loyal as long as they continue to buy and use a good or service (Woodside et al., 1989; Parasuraman et al., 1988; Zeithaml et al., 1996). The behavioral approach includes criteria such as repeat purchases, share-of- wallet, and word-of-mouth referrals, whereas the attitudinal approach consists of criteria like commitment, trust or emotional attachment. The attitudinal approach is that customers feel a sense of belonging or commitment to the good or service. Baumann et al., (2005) noted that Day (1969) four decades ago introduced the concept that loyalty has both behavioral and attitudinal dimensions. Customer loyalty has been recognized by a large number of authors as one of the key topics in Internet that deserves a great deal of attention. According to Griffin (1996), one of the most exciting and successful uses of this revolutionary technology may be the Internet's role in building customer loyalty and maximizing sales to existing customers. One of the reasons for the importance of loyalty in the online context according to Rayport and Sviokla (1994) is the changing role of the content, the context, and the infrastructure in the marketplace. Loyal customers are undoubtedly important because they contribute to the profitability of the service providers (Anderson & Mittal, 2000; Anderson & Sullivan, 1993). They visit a website more frequently than a newly acquired customer and can be served at a reduced operating cost. They provide free word-of-mouth advertising and are likely to pay regular prices. In a recent update on e-loyalty, Reichheld and Schefter (2000, p.107) observed that contrary to current beliefs that price does not rule the Web; trust does. According to the authors, referrals are extremely important in e-services and may count for half of the acquired customers for some services. Furthermore, referred customers were found to ask for advice and guidance from the loyal customers who recommended the service to them, thus reducing the company's costs of providing help. 606 Conceptual framework of the study In line with the literature review and the purpose of the study described in the beginning of the paper, the conceptual framework of this study was configured as illustrated in figure 1 (See Appendix). In this framework security and privacy information as the antecedents will affect trust and trustworthiness, (H1, H2). Besides, trust and trustworthiness has a relationship with loyalty in online marketing as a consequence (H3). H1 0 : There is no significant correlation between trust & trustworthiness and security. H1 1 : There is significant correlation between trust & trustworthiness and security. H2 0 : There is no significant correlation between trust & trustworthiness and privacy information. H2 1 : There is significant correlation between trust & trustworthiness and privacy information. H3 0 : There is no significant correlation between loyalty in online marketing and trust & trustworthiness. H3 1 : There is a significant correlation between loyalty in online marketing and trust & trustworthiness. METHODOLOGY Procedure Data was gathered through a structured questionnaire. The survey was personally administered by the researcher so as to have better communication with the respondents. This reduces incorrect answers which might lead to wrong findings and analysis. The total population for this particular study is all the literate Malaysian and the foreigners in Malaysia; these are those who can read and write and hence they are capable of using the internet and its facilities. These are also the individuals who can get access to the internet and make a proper use of the service. A convenience sampling (non-probability sampling) was used for this study. This type of sampling method was used because it gathers information from members of the population who are conveniently available to provide it. 300 questionnaires were distributed among the respondents of this study and due to difficulties of different castes and nationalities the researcher could successfully collect 105 questionnaires back and hence the sample size used for data analysis and findings was 104 respondents, and the area where the research was conducted is (Selangor, Kuala Lumpur, and Penang), mostly at the universities and at public places likes coffee shops in Malaysia. Questionnaire design The instrument used for data collection for this study is a self-administered questionnaire. This questionnaire was comprised of 38 questions related to internet marketing and consumer experience in computer products. The questionnaire was divided into five parts which were loyalty in online marketing, security, privacy information, trust and trustworthiness, and demographic respectively. The respondents were given options to choose in answering the questions. The options were as follows; Option 1; choose from the given items and Option 2; choose between 1 to 5 where, 1 stands for strongly disagree, 2 for disagree, 3 for neutral, 4 for agree, and 5 for strongly agree. RESULTS Respondents Demographic Profile About 150 questionnaires were distributed to different respondents for data collection and from those 150 questionnaires 100 were interviewed and 50 by e-mail. Out of those 300, 104 607 questionnaires were returned to the researcher. This shows a 69.33% response rate. Among the returned questionnaires, 59 had purchased computer related products online at least once and 45 had never done online purchasing before due to a number of reasons. This means 56.73% of all the respondents have been engaged with internet/cyber space to purchase the computer related products online at least once. The demographic profile of respondents showed that, the sample consisted of male respondents (online purchased of computer related products) were 40 males which were 67.8 percent of all the respondents and 19 females which were 32.2 percent of the respondents. 66.1 percent of the respondents are single, 27.1 percent of the respondents were married, and 6.8 percent of the respondents were divorced. 11.9 percent of the online computer related product purchasers had high school and below qualifications, 13.6 percent of the online computer related product purchasers had diploma qualification, 28.8 percent of the online computer related product purchasers had a bachelor‘s degree, 35.6 percent of the online computer related product purchasers had a master‘s degree, 6.8 percent of the online computer related product purchasers had a PhD and 3.4 percent are professional certificate holders. 20.3 percent of the online computer-related product purchasers were Malay, 16.9 percent of the online computer related product purchasers were Indian, 18.6 percent of the online computer related product purchasers were Chinese and 44.1 percent of the online computer related product purchasers are others (foreigners). Hypotheses Testing H1 0 : There is no significant correlation between trust & trustworthiness and security. H1 1 : There is significant correlation between trust & trustworthiness and security. H2 0 : There is no significant correlation between trust & trustworthiness and privacy information. H2 1 : There is significant correlation between trust & trustworthiness and privacy information. Probability from the regression analysis table results also justifies the relationship between trust and trustworthiness and security in Malaysia. The test gives the p-value of 0.7686. Since p-value is almost 76.8 percent which is higher than 5 percent, we cannot reject the null hypothesis, meaning that the security variable cannot influence trust and trustworthiness individually in the online marketing in Malaysia, because the p-value is more than 0.05; and in this test individually we accept the null hypothesis and reject the alternative hypothesis. The R-Square value is 0.974120 and the r-squared should be more than 60 percent and here the R-squared is more than 0.60. That is the value of R-squared should be reasonable high, more than 60 percent, the higher the R-squared to the fitted data which means that 97.4 percent variation in trust and trustworthiness can be explained by two independent variables such as privacy information and security. The rest 2.6 percent variation in trust and trustworthiness can be explained by residuals or we can say other variables than privacy information and security explain this. From the regression output table the analysis F-test results also justifies the relationship between trust and trustworthiness and other independent variables in Malaysia. Independent variables should be jointly significant. This can be checked using an F-test. If the p-value of the F-statistic is less than 5 percent (0.05) we can reject the null hypothesis and accept the alternative hypothesis. If we can reject the null hypothesis, it means that all the independent variables (privacy information and security) jointly can influence the dependent variable, which is trust and trustworthiness here. Since the p-value is less than 5 percent (here 0.00 percent), we can reject the null hypothesis and accept the alternative hypothesis. In other 608 words, it means that all the independent variables (privacy information and security) can jointly explain or influence trust and trustworthiness. Therefore, the computer industries should increase their site security and also security of whatever an online computer-related products purchaser wants to do on their site to buy their products and everything that affects the product and customer should be secure to obtain the trust and trustworthiness of the online computer industry customers in Malaysia and must combine resources and increase the infrastructure level in the country since this has a direct impact on the online marketing to increase the customer satisfaction and also to change the customer‘s behaviour in the computer industry.. Malaysia needs e-commerce applications as in other countries because this will boost it economy and the living standards of her citizens and also the needs of high e-commerce security. From this analysis, we are accepting the null hypothesis and rejecting the alternative hypothesis, ―There is a significant correlation between trust and trustworthiness and security‖. And also, ―There is a significant correlation between trust and trustworthiness and privacy information‖. H3 0 : There is no significant correlation between loyalty in online marketing and trust and trustworthiness. H3 1 : There is a significant correlation between loyalty in online marketing and trust and trustworthiness. Probability the regression analysis table results also justify the relationship between loyalty in online marketing and trust and trustworthiness in Malaysia. The test gives the p-value of 0.0021. Since p-value which is almost 0.21 percent which is less than 5 percent, so we can reject the null, hypothesis meaning that the trust and trustworthiness variable can influence loyalty in online marketing individually in online marketing in Malaysia, because the p-value is less than 0.05, and in this test individually we reject the null hypothesis and accept the alternative hypothesis. See table 4.8. The R-Square value is 0.964395 and the r-squared should be more than 60 percent and here the R-squared is more than 0.60. That is the value of R-squared should be reasonable high, more than 60 percent, the higher the R-squared the better to the fitted data. It means that a 96.4 percent variation in customer satisfaction can be explained by two independent variables such as customer satisfaction and trust and trustworthiness. The remaining 3.6 percent variation in loyalty in online marketing can be explained by residuals or we can say that other variables other than customer satisfaction and trust and trustworthiness are the cause. From the regression output table the analysis F-test results also justify the relationship between loyalty in online marketing and other independent variables in Malaysia. Independent variables should be jointly significant. This can be checked using an F-test. If the p-value of the F-statistic is less than 5 percent (0.05) we can reject the null hypothesis and accept the alternative hypothesis. If we can reject the null hypothesis, it means that all the independent variables (customer satisfaction and trust and trustworthiness) jointly can influence the dependent variable, which is loyalty in online marketing Since the p-value is less than 5 percent (here 0.00 percent), we can reject the null hypothesis and accept the alternative hypothesis. In other words, it means that all the independent variables (here customer satisfaction and trust and trustworthiness) can jointly explain or influence loyalty in online marketing. 609 Therefore, the computer industries should improve the variables that effect or influence the trust and trustworthiness to increase trust of online purchasers in online marketing and to make the customers loyal to online marketing and also make the computer online customer more satisfied in Malaysia and so must combine resources and increase the infrastructure level in the country since this has a direct impact on the online marketing to increase the customer behaviour positively. Malaysia needs e-commerce applications as other countries do because this will boost its economy and living standards of its citizens and also needs more security services in the online business in computer industry. From this analysis, we are rejecting the null hypothesis and accepting the alternative hypothesis, ―There is a significant correlation between loyalty in online marketing and trust and trustworthiness‖. DISCUSSION From the analysis of the results in the earlier part of this chapter, demographic factors were examined and their effects on e-commerce or online marketing in the computer industry in Malaysia were analyzed critically. Gender and marital status were not included in this demographic factors analysis because there is not much significant difference between gender and marital status in online marketing in computer-related products purchasers. Age, education, and ethnicity showed a difference and effect on online marketing in computer- related products purchasers in the computer industry in Malaysia and showed that they are more satisfied and find online business with good security and good IT services and their behaviour is good and will increase in future by adding some good effective resources in the online business in the computer industry. Young people are seen to be major users of internet and e-commerce services and online computer-related products purchasers, individuals aged 30 years and bellow account for 76.3 percent of all online computer-related products purchasers and older individuals account for 23.7 percent only. Education as well makes a distinct differences on online marketing levels in the computer industry, diploma, bachelor‘s degree and master‘s degree holders account for 78 percent of the online computer related products purchasers in Malaysia, and only 22 percent is accounted for by other education- level groups. Ethnicity also makes a distinct difference on the online marketing level in the computer industry in Malaysia, Malays and others (foreigners) are seen to be major users and online computer-related products purchasers and they account for 64.4 percent of the online purchasers of computer-related products in Malaysia, and Indians and Chinese had 35.6 percent so we understood that these groups are more comfortable, more satisfied and save more on online purchasing and they also find some positive effects in doinge online business in the computer industry in Malaysia. The analysis of these hypotheses shows that, loyalty of customers in online marketing in the computer industry in Malaysia is influenced by trust and trustworthiness; and trust and trustworthiness is influenced by privacy information and security has seen to have no significant effect/influence on trust and trustworthiness in the computer industry in Malaysia, but jointly both (privacy information and security) effect/influence on trust & trustworthiness; So jointly all the variables have a significant effect/influence on loyalty in online marketing in Malaysia. Furthermore, in this study the main result is that all independent variables jointly have been seen to have a significant correlation with loyalty in online marketing or have a significant effect/influence on loyalty and this analysis showed that the online computer customers trust and they have good behaviour in purchasing in association with the computer industry in 610 Malaysia. So this study has found that the online marketing in the ecomputer industry in Malaysia is effective and positive for the online computer products customers. IMPLICATIONS The practical implications and contributions of this study to the body of knowledge comes from the survey and findings of the study. Online marketing players (computer industry) in Malaysia have started to take initiatives to understand their online clients and/or customers (online purchasers) as far as their perceptions, attitudes and habits are concerned. According to the demographic analysis of the findings, the sector should re-look at their strategies so as to incorporate all users of internet and ICT services regardless of their education or age and ethnicity. They should use different strategies and tactics to tackle different groups of customers and hence online marketing and e-commerce adoption in computer industry in Malaysia will be successful. It is s undeniable fact that internet technology and e-commerce requires huge investments in terms of monetary capital and in knowledge/human capital. Therefore, online marketing players in the computer industry in Malaysia must really look into prospective adopters and take respective measures to make sure that they adopt and make use of internet and e- commerce services in the country. From the survey we have seen some important factors which impact on online marketing or influence of online marketing in the computer industry in Malaysia. Therefore the sector must survey each of the factors in detail and see how they can take advantage of each factor in increasing online purchasers and e-commerce usage. This can only be achieved with more research on each factor and putting the findings of the research into practical use and hence accelerate the rate of online purchasers. Extensive online marketing and e-commerce awareness is still not apparent in developing countries like Malaysia.. No one will adopt or use e-commerce/online marketing in the computer industry if he/she is not aware of it. Therefore, the sector and the government must take strong measures to increase awareness among internet users and online purchasers and to non-users of the internet. These measures will increase internet users and hence the same will apply to online purchasers or e-commerce users. ICT and internet/online security was ranked as the highest hindrance towards online marketing in the computer industry in Malaysia. Every internet user and online purchaser needs to feel secure when using the service or otherwise they will not use the service. Online purchasing and e-commerce need personal information and banking information of an individual, and this makes it so important for internet and e-commerce service providers to assure security to their clients and customers while and after using their services. By dealing with this security threat, confidence on internet and e-commerce services will grow among internet users and online purchasers in the computer industry and hence it will not be a threat to those who are using internet and e-commerce services and to those who are adopting online marketing and e-commerce. Survey showed that, those who have adopted online marketing and e-commerce they do not feel very secure when doing online purchases and e-commerce (online transactions) and those who are not using e-commerce and internet services are failing to adopt these practices because of the security reasons. LIMITATIONS OF THE STUDY 611 The online marketing sector is small in Malaysia and it is at a growing stage. This stage of Malaysia‘s online marketing sector in the computer industry in enhancing customer experience which makes it difficult to find sufficient and relevant literature about the online marketing in the computer industry in Malaysia. Most of the information collected for the literature review were from other countries and explain online marketing and the e-commerce situation in other countries such as US, Australia, UK, etc, but few studies on Malaysia. The other countries online marketing literature might not be very accurate and suitable to explain online marketing in the computer industry conditions in Malaysia due to differences in culture and economic strength. A questionnaire was used as a tool for primary data collection for this study. Even though, the re questions were set with multiple choices for respondents to choose, it might lead to wrong choices due to misunderstanding of the order of choices or respondents' biases. This might make the questionnaire not to be flexible enough and limits respondents answers to questions based on the choices given by the researcher and not what they think might be the appropriate answer. This might cause biases in the responses. The sample population for this study was 104 respondents and among 104 respondents 59 were ble to purchase the computer-related products online. These respondents were from various ethnic, age and education groups. The findings could have been more accurate and more reliable if the sample size was larger.. The higher the sample size the higher the significance of the findings. More than 150 questionnaires were sent out but only 59 replied. Therefore, there is a low response rate for mail and the interview questionnaire method of data collection. However, due to time constraints, funds and availability of manpower, this sample size had to be used for the study. DIRECTIONS FOR FURTHER RESEARCH Factors found in this study are not the only factors that influence internet/online marketing on the computer industry in Malaysia. More attitudinal factors which were not included in this study could be explored to further explain online marketing in the computer industry in Malaysia. Comparisons between individual internet users and/or online purchaser and non- users and/or non-online purchasers on the factors influencing or hindering them from adopting online marketing and e-commerce could be included for more accuracy. A larger sample can be used in further studies to improve the accuracy and reliability of the findings. The future researches on Malaysia's online marketing in the computer industry situation should be conducted over a wider geographical area. This would enable the results to be more representative than the results from one or a few regions only. Similar studies have been done in other countries but few studies had been attempted in the Southeast Asia region, so we encourage researchers to do more research on online marketing in the computer industry in the southeast Asian region and this would be likely to influence the adoption and usage of internet and online marketing in the computer industry in the region. Finally,, more research should be undertaken on the online marketing area focusing on the computer industry. This will help us to determiner what is necessary for the computer industry in Malaysia to adopt online marketing in their business environment; and if this occurs it will be easier to spread adoption to customers. 612 CONCLUSIONS The purpose of this research is to investigate the effects of security and privacy information on trust and trustworthiness and loyalty in online marketing. 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Error t-Statistic Prob. C 0.068122 0.108760 0.626348 0.5336 Privacy information 0.947084 0.095990 9.866445 0.0000 Security 0.028144 0.095193 0.295652 0.7686 R-squared 0.974120 Mean dependent var 2.474576 Adjusted R-squared 0.973196 S.D. dependent var 1.119666 S.E. of regression 0.183312 Akaike info criterion - 0.505746 Sum squared resid 1.881783 Schwarz criterion - 0.400108 Log likelihood 17.91950 F-statistic 1053.917 Durbin-Watson stat 2.018891 Prob(F-statistic) 0.000000 Trust and Trustworthiness Loyalty in Online Marketing Security Privacy Information 617 TABLE 2. REGRESSION OUTPUT Dependent Variable: Loyalty in online marketing Method: Least Squares Date: 12/24/09 Time: 18:08 Sample: 1 59 Included observations: 59 Variable Coefficie nt Std. Error t-Statistic Prob. C - 0.452976 0.187403 -2.417125 0.0189 Trust & trustworthiness 0.480871 0.148881 3.229912 0.0021 R-squared 0.964395 Mean dependent var 2.491525 Adjusted R-squared 0.963124 S.D. dependent var 1.072748 S.E. of regression 0.206002 Akaike info criterion - 0.272353 Sum squared resid 2.376461 Schwarz criterion - 0.166715 Log likelihood 11.03441 F-statistic 758.4136 Durbin-Watson stat 2.255426 Prob(F-statistic) 0.000000 618 AN EVALUATION OF INDEPENDENT ENTREPRENEURSHIP OBSTACLES IN INDUSTRIAL SMES IN MALAYSIA - A CASE STUDY Ali reza hedari Hamed Aramesh Multimedia University, Malaysia
[email protected] Noor Mohammad Yaghoobi Habibollah Salarzehi University of Sistan and Baluchestan, Iran ABSTRACT Improving socio-economic structure and resources of any society to a great extent depends on the efficacy of the research methods and technological developments being practiced in that society. This paper investigates the factors that influence these practices in general and the entrepreneur factor in particular, which plays a significant role in infusing creativity and innovation into the socio-economic structure of the society and provides insights into tackling problems entrepreneurs face in the context of the study, in a province in southeast Iran. The study draws on data from survey questionnaires distributed among 160 experts and entrepreneurs across the region. The analysis indicated that entrepreneurship is a significant element in influencing the productivity and economic development of the province. Three main factors influencing the quality of services provided by entrepreneurs were identified as environmental, organizational and personal obstacles. The study suggests that in order to have efficient entrepreneurship and thereby an economically dynamic and growing society, governmental organizations and other institutions engaged in entrepreneurship development need to take these factors into account. Moreover, the study develops some sub-categories of these three factors which are assumed to help entrepreneurship practitioners improve the services they provide. Key words: Entrepreneurship, primary industry, independent entrepreneurship, personal factors, environmental factors, organizational factors INTRODUCTION In the present global competitive economy, which can be characterized by its constant and rapid changes, entrepreneurship is considered as a core economic component that can boost 619 productivity, employment, economic growth, and social welfare in a society. Over the past two decades, entrepreneurship has gained interest from more developed countries and it is only recently that the so-called developing countries have started to pay considerable attention to this phenomenon due to its significant role in tackling socio-economic challenges such as unemployment and social welfare. Consequently, appropriate strategies, policies, training and socio-economic planning have taken place to create a conducive atmosphere for entrepreneurial activities which provide easier access to global markets. The term ‗entrepreneur‘, which is taken from the French language, dates back to the 18 th century. It is used to refer to a person in charge of an important project. More specifically, this term is used to identify people who are able to take risks; those who can take initiatives and have the zeal for discovering and providing guidelines which can uplift the economic status of the society. LITERATURE REVIEW Entrepreneurship has been investigated by several scholars and theoreticians from multiple disciplines including but not limited to economics, sociology, and management. Each of these areas of inquiry has had its own impact on the process of entrepreneurship throughout the relatively short history of this phenomenon, which will be delineated in more detail in the following sections. A) Entrepreneurship and the Economic Approach Entrepreneurship was first introduced in the field of economics and has been conceptualized and has drawn on the work of economists since the 16 th century. Likewise, entrepreneurs have been the pioneers of economic growth in most of the new global markets. For this reason, the 21 st century may become known as the century of entrepreneurs. The initial notion of entrepreneurship which was proposed by Richard Kontilon dates back to 1734. Kontilon‘s definition of entrepreneurship was ―Taking the unguaranteed risks‖. John Batiste (1800), a French economist, differentiated between the interests gained by investors and entrepreneurs. He views the entrepreneurs as people who try to change the current resources such as human forces, raw material, construction materials, money, etc, to resources of added value in comparison to their current value so as to increase productivity. On the other hand, other early scholars believed that entrepreneurs are the main causes of changes in the economy. They advance the economy via creating new markets and developing new job opportunities which boost the economy. 620 Roemer (1990), contended that economic growth is a developing structure for those who want to benefit from its profits, although he believes there is no necessity for these people to be entrepreneurs, but an organization can be an entrepreneur by introducing and using these new innovations. In sum, Pirich and his colleagues define the role of economist in making entrepreneurship theory in different ways. Kontilton (1775) had defined an entrepreneur as a person who takes the risk to buy goods at a specified price and tries to sell them at a higher rate of interest either in its original form or in the form of a new material. Knight (1921) defined entrepreneurs as the pioneers of economics, those who can make a change and innovate by taking risks and managing uncertainties. Liebnstein (1968) believed that successful entrepreneurs are those who can overcome market complications and instabilities. Bolton (1971) has noted several economic functions of entrepreneurs in a society: Innovation in the market, variety in production and services and providing a suitable base for the development of primary industries. In the same vein, Kirzner (1973) believed that the relationship between entrepreneurship and economic growth is a good indication to identify and make use of market opportunities. Likewise, Casson (1982) stated that an entrepreneur is a person who is capable of organizing the resources without having much of the required knowledge of them. Generally,in spite of various definitions and views about entrepreneurship, its origin is in economic schools of thought. Among the most important schools of thought which have studies entrepreneurship are profitableness, Physiocrats, classics, Marxists (Spiegel, 1983, Palmer, 1987, ), neoclassic and finalisms (Jennings, 1994, as well as the German- Austrian traditional school and Chicago school (Jennings, 1994, . Barreto, 1989, ) and the Austrian new school (Herbert and Lhuk. Kirzner, 1982, ). B) Entrepreneurship and the Characteristics Approach Since 1950, entrepreneurship has attracted the attention of psychologists, who were interested in studying personal characteristics of entrepreneurs. They were looking for the characteristics that distinguished entrepreneurs from other people. Thus, this is known as characteristics approach. Several scholars and theoreticians have assertions about the characteristics of entrepreneurs. In general, characteristics such as the need to fulfill ambitions (Mcclelland, 1962,), inclination towards risk taking (Brockhaus , 1980 , ; Longenecker et al , 1997), need for autonomy (Mckeran and Flanningn , 1996, ; Jennings , Cox and Cooper, 1994 ), creativity 621 (Draker , 1985), and tolerance of ambiguity (Trapman and Morningstar,1989, are attributed to these groups of people. C)Entrepreneurship and the Environmental Approach Most scholars believed that personal attitudes and characteristics in entrepreneurship play a key role. Thus several researches have been conducted on successful entrepreneurs‘ personality traits. The trend lasted till Gartner challenged the characteristics approach. He believed that the behavior of creating a new job or business in entrepreneurs is not rooted in their personality. This critical view, led to reconsideration of characteristics approach by its proponents, and on the other hand it launched a new array of studies, which emphasized the influential role of environmental factors in success of entrepreneurs. Based on the environmental approach, social, cultural, and economic context in which entrepreneurship takes place is more important and that personal characteristics are not considered as key elements in entrepreneurship. According to this approach, cultural-social factors include social class, experiences, family background, education and other social- cultural resources in the environment. Likewise, economic factors encompass accessibility of capital, credit and financial institutions, supply and demand factors as well as the market structure. Olm & Eddy (1985) in reviewing the literature and analyzing the previous studies provided a comprehensive list of the environmental factors influencing entrepreneur activities at the start point. These factors include: bankers, competitors, customers, economy, social traditions, educational institutions, governments, media, religious and technological organizations, and unions. These are external factors that are extremely uncontrollable. Aldrich (1986) recommended that entrepreneurs must be viewed in a social unique structure so that be supported based on their situation in that social network. He believed that these social networks not only can, by introducing opportunities, simplify activities of potential entrepreneurs, but also can provide a huge amount of resources for a new activity. Entrepreneurship is divided into several kinds that are introduced with titles such as independent entrepreneurship, organizational entrepreneurship, cooperative entrepreneurship and international entrepreneurship (Gasse, 1985, Hirsch 1992). In this study the main emphasis was on the independent entrepreneurship in the industrial sector. Also there was an attempt to design a conceptual model for the research so that by using a comprehensive approach we could address the obstacles and difficulties that 622 entrepreneurship encounter in the context of this study and thereby we provided solutions and suggestions on how to remove those obstacles and tackle those difficulties. RESEARCH OBJECTIVES The main purpose of this research was to find out and to assess barriers and difficulties that independent entrepreneurs face at Sistan and Baluchistan province located in northeast Iran. More specifically, the following objectives guided this study: 1. To identify and classify environmental obstacles that independent entrepreneurs encounter in industrial sector at Sistan and Baluchistan, 2. To identify and classify organizational barriers for independent entrepreneurship in industrial sector at Sistan and Baluchistan , and 3. To identify and classify personal barriers for independent entrepreneurship in industrial sector at Sistan and Baluchistan. Conceptual Model of the Study: In this study the barriers impeding independent entrepreneurship in the context of the study were classified into three main categories: environmental, organizational and personal. In choosing the dimensions for the model the focus has been to identify some dimensions that are based on strong research-based justifications. For this purpose, the model uses environmental factors from Gartner (1985), Marks Vertman (1986), Churchill and Louis studies, organizational factors from Hornsby et.al (1993), Mc Cloy and Aldrich (1989), and personal factors from studies of Jennings et.al (1994), Brockhaos (1980), Mc Clelland (1962) and others. Having synthesized the main categories of these studies in the model, a set of new sub-categories were also extracted and suggested from these components as follows: FIGURE 1: RESEARCH CONCEPTUAL MODEL Environmental Factors 623 Research Hypotheses: Based on the proposed conceptual model the hypotheses were formulated: 1. Environmental factors are the barriers for independent entrepreneurship in Sistan and Baluchistan. 2. Organizational factors are the barriers for independent entrepreneurship in Sistan and Baluchistan. 3. Personal factors are the barriers for independent entrepreneurship in Sistan and Baluchistan. METHODOLOGY The study used both descriptive and quantitative approaches to collecting and analyzing the data. The main instrument was a survey questionnaire developed based on previous studies in the literature. Questionnaire items were collected from different studies that were related to entrepreneurship. For this purpose, questionnaires from previous studies by Gartner (1985), Marks Vertman (1986), Churchill and Louis studies, Hornsby et.al (1993), Mc Cloy and Aldrich (1989), Jennings et.al (1994), Brockhaos (1980), McClelland land (1962) and Fray were adopted and used for the present study. The questionnaire required the participants to indicate their level of agreement or disagreement on a 5-point Likert-type scale from strongly agree to strongly disagree. The reliability of the questionnaire was assessed through a piloting phase which included both asking for expert views and statistical analysis using SPSS 17. The questionnaire had a Cronbach alpha index of .93, which indicates a high reliability of the instrument. The population for the study consisted of 850 experts and professionals in the field of entrepreneurship, and those who were familiar and actively involved in this field in Sistan and Baluchistan province. The questionnaire was administered among 250 participants and 160 were returned to the researchers. It is worth mentioning that random sampling was used for this study which was important to maintain the credibility and generalizeablity of the results. Also, it is important to have an appropriate sample size and Independent Entrepreneurship Barriers Personal Factors Organizationa l Factors 624 adequate number of population in order to be able to claim generalizeablity of the findings. The following is the formula used to determine the size of the sample: ) 1 ( ) 1 ( ) 1 ( 2 2 2 2 2 p p Z N p p NZ n ÷ + ÷ e ÷ = o o Variables used in this formula are presented in the following box: RESULTS AND FINDINGS Hypothesis 1: H0: Environmental factors are not the barriers for independent entrepreneurship in Sistan and Baluchistan H1: Environmental factors are the barriers for independent entrepreneurship in Sistan and Baluchistan Test Hypothesis: the value of this criteria based on Alpha test is 0/05 and freedom degree is 14 that based on freedman test this number is 1050/26. Following table demonstrate the calculations: TABLE 7: CALCULATIONS FOR HYPOTHESIS 1 Decision making: here the calculated number (1050/26) is compared with the critical amount. Because the amount of the criteria is in the critical area so H0 is rejected and H1 is accepted. Conclusion: we can say that at the level of 95 percent environmental factors are the barriers to independent entrepreneurship in Sistan and Baluchistan. The following table demonstrates the calculations: TABLE 8: CALCULATIONS FOR HYPOTHESIS 1 AND CRITICAL VALUES Test result Asymp. Sig Calculated tests criteria Critical amount Freedom degree Error level Reject H0 0.000 62 / 0101 26 / 62 01 0.05 N 160 Chi-Square 62 / 0101 df 01 Asymp. Sig. .000 N: population size (850 people in this study) Z : standard deviation (95%=1/96) €: researcher error (0/06) P (1-p): variance (0/25) n: sample size (unknown) 625 Hypothesize 2: H0: Organizational factors are not the barriers for independent entrepreneurship in Sistan and Baluchistan H1: Organizational factors are the barriers for independent entrepreneurship in Sistan and Baluchistan Test Hypothesis: the value of this criteria based on Alpha test is 0/05 and freedom degree is 15 based on Freedman test it is 1112/127. The following table shows these calculations. TABLE 9: CALCULATIONS FOR HYPOTHESIS 2 N 160 Chi-Square 1112.127 df 15 Asymp. Sig. .000 Decision making: here when we compare these calculated values with critical values, because it is in critical area so H0 hypothesis is rejected and H1 is accepted. Conclusion: We can say at the level 95 percent organizational factors are the barriers for independent entrepreneurship in Sistan and Baluchistan. The following table demonstrates these calculations. TABLE 10: CRITERIA CALCULATIONS AND CRITICAL VALUE FOR HYPOTHESIS 2 Test result Asymp. Sig Test calculated criteria Critical amount Freedom degree Error level Reject H0 0.000 60 1112.127 15 0.05 Hypothesize 3: H0: Personal factors are not the barriers for independent entrepreneurship in Sistan and Baluchistan H1: Personal factors are the barriers for independent entrepreneurship in Sistan and Baluchistan 626 Test Hypothesis: The value of the criteria for the test with 0/05 Alpha and freedom degree of 12, is based on Freedman test is 1361/475. The following table demonstrates the calculations: TABLE 11: CALCULATIONS FOR HYPOTHESIS 3 N 160 Chi-Square 1361.475 df 12 Asymp. Sig. .000 Decision making: Here we compare the calculated value with critical value (21/03). Because this value is located in critical area so H0 is rejected and H1 is accepted. Conclusion: W can say that at the level of 95 percent personal factors are the barriers for independent entrepreneurship in the industrial sector at Sistan and Baluchistan. The following table shows the calculations: TABLE 12: PERSONAL FACTORS BARRIERS Test result Asymp. Sig Calculated criteria for the test Critical amount Degree of Freedom Error level Reject H0 0.000 21,03 1112.127 12 0.05 CONCLUSIONS AND RECOMMENDATIONS: As the research findings show, all three hypotheses were confirmed and due to these findings it is argued that the three hypothesized factors i.e. organizational, personal, and environmental are the main barriers for independent entrepreneurship in the Sistan and Baluchitan industrial sector. Figure 5 demonstrates the ratings for each of these factors. Organizational factors: 1. Inadequate number of experts in developing plans in the province 2. Inadequate number of expert consultants in financial/fiscal affairs of the plan 3. Inadequate number of supervisor consultants 627 4. High cost of consultancy at the present 5. Lack of induction programs to new sample plans 6. Inaccessibility of successful exemplary plans for entrepreneurs 7. Inaccessibility of updated information for entrepreneurs due to limitations in local media 8. Inefficiency in developing new ideas 9. Unavailability of sites for conducting entrepreneurship experiments in business incubators 10. Not providing opportunities for entrepreneurs to exchange experiences 11. Weaknesses in securing investment sectors in the province 12. Inadequacies in transportation products 13. Shortage of efficient and expert human workforce 14. Lack of primary industrial sectors in the province Personal factors: 1. Low creativity of entrepreneurs 2. Low flexibility of entrepreneurs 3. Lack of tolerance of ambiguity in entrepreneurs 4. Being too ambitious and unrealistic in initial development of plans 5. Poor accountability in making independent decisions 6. Being reluctant to receive feedback for their activities 7. Not working hard enough to meet the requirements 8. Early disappointment and withdrawal from the execution of the plans 9. Lack of adaptation and taking risk to accept massive projects 10. Being inexperienced 11. Lack of enough required skill and expertise 12. dissatisfaction with previous job Environmental factors: 1. High number of documents and requirements for application of entrepreneurship 2. Long period of bureaucracy and going through the red tape 3. High number of inquiries from other institutions 4. Unclear information regarding the requirements for application for entrepreneurship 5. Low rate of subsidy provided for entrepreneurship 6. High rate of interest for the loans given to entrepreneurs 628 7. Long period of processing the applications in target banks 8. Requiring for bails and financial guarantee beyond the capability of the entrepreneurs 9. Lack of clearly defined objectives for the entrepreneurship in the province 10. Not receiving enough support from the government 11. Lack of incentives from the government to stimulate entrepreneurs 12. Inappropriate consultation and guidelines provided by banking and executive sectors 13. Low expertise in executive staff and bank officers in charge of entrepreneurship 14. Limited number of executive staff and bank officers in charge of entrepreneurship cases 15. Inappropriate dedication and division of capital for entrepreneurship training and research projects Regarding the ranking and significance level of each main and subsidiary factor (Figure 5) the following suggestions are made to solve entrepreneurship problems in industrial sector at Sistan and Baluchistan province: 1. Due to the special conditions in this area and because of the distance between Sistan and Tehran, it seems to be important to allocate more subsidies to the entrepreneurs and give them enough time to pay back their loans. 2. Decreasing bureaucratic procedures and providing some facilities for entrepreneurs such as shortening the list of required documents to avoid discouragement among them 3. Facilitating processes for getting loans 4. Employing the professionals and experts and training the present crew 5. Providing enough training for human resources to improve the quality of services 6. Defining clear objectives and the main focus for investment in Sistan and Baluchistan 7. Increasing the budgets for R&D and activating entrepreneurship centers in governmental organizations 8. Providing some facilities in paying the tax and providing incentive to encourage them to pay their taxes in time 9. Providing the bases for primary industries to invest in the region 10. Maintaining active relations between industry and university 11. Doing arrangements for the entrepreneurs to network 12. Providing a financially secure and stable atmosphere for investors in the region 629 13. Specifying and titling a day for entrepreneurs to get together and exchange experiences 14. Supporting entrepreneurs through consultancy agencies including the consultancy expenses as part of facilities they receive 15. Conducting training and instructional workshops for entrepreneurs by the related organizations 16. Requiring the entrepreneurs to report their progress in written so as they can be given appropriate feedback to improve their work 17. Conducting workshops on risk management in their jobs and getting familiarizing them with different risk-taking strategies 18. Conducting creativity and innovation workshops which are now popular courses at universities around the world. These workshops can enable entrepreneurs to cope with difficulties in different situations, anytime and anywhere. 19. Providing induction programs for entrepreneurs and introduce them innovative methods and exemplary entrepreneurship practices in the county and the world. 630 REFERENCES Barreto, H. (1989), The Entrepreneur in Microeconomic Theory: Disappearance and Explanation. London: Routledge Pub. Co. Boyett, I. (1996), "The public sector entrepreneur: a definition", International Journal of Public Sector Management, Vol. 9 No.2, pp.36-51. Brockhaus, R. (1980). ‗The Effect of Job Dissatisfaction on the Decision to start a Business, Journal of Small Business Management p.181. Churchill, N. and Lewis, V. (1986) Entrepreneurship Research: Directions and Methods, In D. Sexton & R. Smilor (eds). "The Art and Science of Entrepreneurship". Cambridge, Mass. : Ballinger. Drucker, P. (1985). Innovation and Entrepreneurship , NY:Harper Collins Publisher. Drucker, P. (1985). The Discipline of Innovation. Harvard Business Review. May – June, pp.67-72. Guzman, C. (1994). Toward a Taxonomy of Entrepreneurial Theories. International Small Business Journal 12, p.40. Hornsby, J. et al. (1993). An Interactive Model of the Corporate Entrepreneurship Process. Entrepreneurship Theory and Practice, Vol. 17 No.2, pp.29-37. Jennings, D., (1994). Multiple Perspectives of Entrepreneurship Test, Readings, and Cases, Cincinnati, Ohio: South – Western Publishing Co. 27(3), pp.365-374. Jennings, R., Cox, C. and Cooper, C. (1994). Business Elites, London: Routledge. Kirzner,I. (1982). Uncertainty, Discovery and Human Actions: A Study of the Entrepreneurial Profile in the Missiam System, In I. Kirzner(ed), In ―Method, Process and Austrian Economics. Mass: Lexington Books. Longenecker, G. Moore, C. and Petty, W. (1997). Small Business Management: An Entrepreneurial Emphasis, Cinicinnati, Ohio: South – Western College Pub. McKeran, D. and Flannigan, E., (1996). Shaping the Entrepreneurial Company, Chalford: Management Books 2000 Ltd. Palmer, M. (1987). The Application of Psychological Testing to Entrepreneurial Potential, In C. Baumback, & J. Mancuso(eds). Entrepreneurship and Venture Management N.J.: Prentice – Hall Inc. Pirich, A. & Kunckey, S. & Campbell, J. (June, 2001). "An Interface between Entrepreneurship and Innovation. New Zealand SMEs Perspective", Prepared for DRUID Nelson & Winter Conference, A Alborg University, Denmark . Spiegel, W. (1983). The Growth of Economic Thought, Durham, N.C.: Duke University Press. Tropman, J. and Morningstar, G. (1989). Entrepreneurial System of the 1990s, New York: Greenwood Press Inc. 631 Wortman, M. (1986). ‗A Unified Framework, Research Typologies and Research Prospectives for the Interface Between Entrepreneurship and Small Business. In D. Sexton & R. Smilor(eds)‖, The Art and Science of Entrepreneurship‖, Cambridge, Mass.: Ballinger. 632 ATTITUDES TOWARDS THE EFFECTS OF GREEN PRODUCTS ON THE ENVIRONMENT: AN INDONESIAN CASE STUDY Marthin Nanere*
[email protected] La Trobe University, Bendigo, Australia Lizar Alfansi
[email protected];
[email protected] Magister Manajemen, University of Bengkulu, Indonesia Ferry Tema Atmaja
[email protected];
[email protected] Magister Manajemen, University of Bengkulu, Indonesia ABSTRACT The environment has become a popular topic in public and private sector. Some environmental problems have been associated with individual consumption, and this has led to the environmental problem down to the consumer level. This raises the questions whether consumer environmental awareness has increased, and whether consumers have translated their environmental concern into purchasing green products. This research attempts to provide meaningful insights to cognitive and affective concepts of environmental behaviour. By replicating the study of other researchers, it assesses the relationship between multiple product line specific environmental knowledge and attitudes and compares it with other studies. The findings indicate that consumers’ attitudes towards the impact of green product lines on the environment are significantly higher than their knowledge of the impact of those green product lines on the environment. There is also a significant and positive relationship existing between knowledge of and attitudes towards the impact of green product lines. These findings substantiate the finding of previous research in the similar area. Keywords: Environment, green product, environmental behaviour, cognitive and affective. 633 INTRODUCTION Green products have generated considerable concerns within the community since 1990s. Research has indicated that public initiatives for supporting government spending towards environmental causes have increased since 1990. Consumers were so much concerned with the environment that they were even willing to forgo economic development for environmental protection and even considered themselves as environmentalists (Gallup & Newport, 1990; Hueber, 1991; Kohut & Shriver, 1989). This research investigates several important issues relating to consumers‘ attitudes, such as: are positive attitudes sufficient to justify green purchase behaviour? Is there a rationale for firms to further invest in advertising strategies reinforcing favourable green attitudes? How important is knowledge in terms of influencing consumer behaviour? To explore these key issues it is necessary to conceptualise the impact of consumer‘s environmental behaviour. Antecedents of environmental behaviour are not new concepts. Maloney and Ward‘s (1973) identified that knowledge and attitudes were the key antecedents that are crucial in modifying behaviours. In order to capture the entire environmental consciousness, researchers have identified environmental knowledge, attitudes and behaviour (Schlegelmilch, Bohlenand Diamantopoulos, 1996). In fact, it has been found that when there are relationships, they appear to have less explanatory power than the psychographic variables (see Schwepker and Cornwell, 1991; Shrum, Lowrey, and McCarty, 1994). Several studies have shown weak relationships between environmental attitudes and behaviors (Shrum, McCarty, and Lowrey, 1995). Researchers have put forward many suggestions and integrated relationships. However, since knowledge and attitudes are determinants of behaviour (Blackwell et al., 2007), the key constructs to environmental behaviour that are worthy of examining are knowledge and attitudes. This study has been designed to provide meaningful insights of cognitive and affective concepts of environmental behaviour. The two constructs, knowledge and attitudes that compose environmental behaviour will be used to determine the understanding of consumer‘s self-reported green behaviour. By replicating the research conducted by Martin and Simintiras (1995), this research attempts to assess the relationship between multiple product line specific environmental knowledge and attitudes and compare the findings with those of other studies within the area. THEORETICAL FRAMEWORK Hines, Hungerford and Tomera (1986) categorised environmental behaviour into cognitive, affective and situational factors. Whilst cognitive factors demonstrate knowledge of the environment, the affective factors show the feelings or emotions associated with objects and are often coupled with attitude, locus of control and responsibility (Hwang, Seong-IL Kim and Jeng, 2000). The situational factors that came under economic limitations, social influences and the desire to choose were found to be either compensating or strengthening the cognitive and affective factors (Hines et al (1986). 634 ATTITUDE Attitudes are predispositions towards behaviour which can have the most significant influence on behaviour (Newhouse, 1990). Environmental attitudes characterises a consumer‘s feelings towards environmental issues in terms of being favourable or unfavourable (Hines et al, 1986; Newhouse, 1990). Whilst Azjen‘s and Fishbein‘s (1980) model towards attitudes included general attitude towards an object, they also suggest that there are more specific attitude towards certain issues or attitudes towards intention to act. In terms of attitude to act towards the environment, Hines et al (1986) proposed two kinds of attitudes: one toward ecology and the environment, and the other towards environmental action. However, research on these issues is not conclusive. Ward (1973), Arbuthnott and Lingg (1975) and Seligman, Kriss, Darley, Fazio, Becker and Pryor (1979) established weak relationships between attitude and behaviour (Maloney and Ward, 1973). On the contrary, Loundsbury and Tournatzky (1977) identified a stronger relationship. Therefore, if an attitude is "an enduring set of beliefs about an object that predispose people to behave in particular ways toward the object" (Weigel, 1983, p. 257) then the question arises whether environmental attitudes can predict behaviour? The general consensus is that if consumers hold a favourable attitude, they are expected to behave in consistent with that attitude. There could be several plausible explanations to this situation. Given that that there are weak relationships between environmental knowledge behaviour/attitude-behaviour relationships, researchers have secluded behaviour and have attempted to consider the relationship between environmental knowledge and environmental attitudes. The results have been far more significant when this was considered. Maloney and Ward (1973), found low correlations between environmental knowledge and environmental attitudes, while Synodinos (1990), Henion and Wilson (1976), Dispoto (1977), and Grunert and Grunert (1993) found no significant correlation between these two variables. Davis (1993) found that advertisements have had a positive impact on consumer attitudes and it has been suggested that consumers who have high levels of product line specific environmental knowledge may have more positive attitudes towards that green product line (Martin and Simintiras, 1995). It, therefore, follows from the above discussion that there could be some relationship between product line specific environmental knowledge and attitudes. Thus, it is hypothesised: H1: There is a relationship between product-line-specific environmental knowledge and product-line-specific environmental attitudes. KNOWLEDGE It has been established that knowledge is required to enhance any environmental action (Hines et al, 1987). The different levels of knowledge that influence behaviour can be categorically divided into three levels. The first being knowledge about the issue. The second concerns knowledge about action strategy; and the last is about knowledge relating to action skills (Boerschig and DeYoung, 1993 and Hines et al, 1986). Research repeatedly confirmed that lack of knowledge was one of the most crucial reasons for non-action (Walkley, Erikson, & Tilby, 1988). While a few studies have identified the exact relationship between environmental knowledge and behaviour, some have shown that environmental knowledge does not have a significant impact on behaviour (Arbuthnott and Lingg, 1975; Geller, 1981). 635 One can assume that consumer‘s behaviour can be modified based on how knowledgeable they are about the environment. For instance, they have advocated that the more knowledgeable the consumers are, the greater would be their awareness level and more favourable the attitude would be (Hungerford & Volk, 1990). Hence, the second hypothesis is set as follows: H2: Consumers believe that products are good for the environment without actually knowing how the product influences the environment. METHODOLOGY The sample for the study consisted of 310 students from University of Bengkulu, Indonesia. Of 310 students, 165 and 145 were undergraduate and postgraduate students respectively from different departments including management, economic, accounting, magister management and law. A structured questionnaire was used to collect the data. Participants were selected in a way so the sample becomes representative of the population of the university in terms of sex, instead of randomness. The questionnaire was developed based on Martin and Simintiras (1995) study that was used to measure subjects‘ product-line-specific environmental knowledge and attitudes. The questionnaire consisted of two sections. Section one comprised of questions related to knowledge and attitude toward the impact of green products on environmental protection. Section two consisted of questions on demographics of respondents. The statistical techniques used in the analysis included a paired t-test, Pearson correlation test (two-tailed), and the standard descriptive statistics such as mean and standard deviation. SPSS Statistical Package was used for analysing the data. FINDINGS Findings relating to the hypotheses: With regard to H1, it is found that there is a significant weak positive relationship existing between knowledge of and attitudes towards the impact of green product lines on the environment. This finding is consistent with the findings of Martin and Simintiras (1995). This is also supported by other studies that examined general environmental knowledge and attitudes, and also found weak correlations (Grunert and Grunert, 1993; Maloney and Ward, 1973 and Synodinos, 1990). 636 TABLE 1: CORRELATION BETWEEN KNOWLEDGE OF AND ATTITUDES TOWARDS THE IMPACT ON THE ENVIRONMENT OF GREEN PRODUCT LINES Green product line Correlation coefficient Level of significance Recycled paper products 0.311 0.000 Products not tested on animals 0.114 0.045 Green laundry detergents 0.183 0.001 Green cleaning products 0.185 0.001 Ozone friendly aerosols 0.197 0.000 Unleaded petrol 0.297 0.000 Energy saving appliances 0.224 0.000 Products in recycled/recyclable packing 0.323 0.000 Compostable nappies 0.149 0.009 Table 2 provides a descriptive analysis showing that attitude values are slightly higher than knowledge. A paired t-test would show us better estimates. The results are presented in Table 3. TABLE 2: DESCRIPTIVE STATISTICS OF KNOWLEDGE AND ATTITUDE TOWARDS GREEN PRODUCT LINES Green product line Knowledge variables Attitude variables Mean Standard deviation Mean Standard deviation Recycled paper products 3.10 1.028 3.96 1.025 Products not tested on animals 1.95 .985 2.81 1.144 Green laundry detergents 2.19 1.164 3.82 1.042 Green cleaning products 2.66 1.120 4.03 .945 Ozone friendly aerosols 2.07 1.147 3.90 1.079 Unleaded petrol 2.37 1.238 3.74 1.061 Energy saving appliances 3.32 1.071 4.21 .942 Products in recycled/recyclable packing 3.10 1.133 3.77 1.127 Compostable nappies 2.05 1.126 3.73 1.131 Scale 1= ‖know nothing about‖, 5=‖ know extremely well about‖ Scale 1= ‖strongly disagree‖, 5=‖strongly agree‖ Based on the results presented in Table 3, it can be inferred that attitudes have a higher value than knowledge. Since the value of paired t-test is large, we cannot conclude that there is an effect as there is no clear evidence of such an effect. Thus, consumer‘s attitudes towards the impact of green product lines on the environment are significantly higher than their knowledge of the impact of those green product lines on the environment. This result does not support the findings of Martin and Simintiras (1995) which indicate that attitudes are not significantly higher than knowledge of the impact of green product lines on the environment, suggesting that that there is sufficient evidence to accept H2. 637 TABLE 3: PAIRED T-TESTS BETWEEN KNOWLEDGE OF AND ATTITUDES TOWARDS THE IMPACT ON THE ENVIRONMENT OF GREEN PRODUCT LINES Green product line Paired t-test Level of significance Recycled paper products -12.580 0.000 Products not tested on animals -10.662 0.000 Green laundry detergents -20.309 0.000 Green cleaning products -18.259 0.000 Ozone friendly aerosols -22.809 0.000 Unleaded petrol -17.651 0.000 Energy saving appliances -13.771 0.000 Products in recycled/recyclable packing -8.983 0.000 Compostable nappies -20.017 0.000 DISCUSSION Our study indicated differences when compared to those of Martin and Simintiras (1995). The interpretation of the above analyses indicates that Indonesian consumers are becoming more concerned about environmental issues. These results appears to contradict prior research that show claims made by advertising generally demonstrated a negative attitude on green product lines (Moore, 1993; Ottman, 1992 and Burnside, 1990). Here consumers‘ attitudes appear to be more positive towards green product lines. Whilst knowledge is significantly important to consumers in order to help them make decisions about a product, attitudes express disposition towards a brand. Having a positive attitude towards a brand enables a consumer to have positive intentions to buy the brand. More knowledge may help in restoring brand loyalty. Providing information would equip a consumer with knowledge. Consumers need to be provided with more information about green products or alternatively, they could also be satisfied with the information available and are likely to be savvy towards environmental aspects of the type of products the research has examined. CONCLUSIONS This paper has several limitations that need to be taken into account in interpreting and generalising the results. Firstly, it is noteworthy that despite controversies as mentioned in the literature over knowledge and attitude behaviours towards the environment, green product lines continue to grow rapidly. Future research can be directed towards examining why it is happening. Secondly, single response measures were used to measure knowledge and attitudes in this study but in fact attitudes are best measured by multiple measures with regards to the environment (Gill et al, 1986). This may have affected the results of the study, hence needs to be interpreted with caution. Future research can therefore use multiple measures for the ‗environment‘ construct to see if there is any change in results from this. Future research can also address the issue of intentions to buy green products. Hines et al (1986) suggested some behavioural concepts combining attitudes, knowledge and situational influences that can be the basis of future studies. Furthermore, in addition to behavioural intentions, willingness to pay for green products should also be examined to provide the marketer with better insights into buying behaviour of green products. 638 REFERENCES Arbuthnott, J. and Lingg, S. (1975), ―A comparison of French and American environmental behaviours, knowledge and attitudes‖, International Journal of Psychology, Vol. 4 No. 10, pp. 275-81. Blackwell, R., D‘Souza, C., Taghian, M., Minard, P and Engel, J (2007): Consumer Behaviour,: An Asia Pacific Approach, 1 st edn. Thomson Learning, Melbourne, Australia. Boerschig, S. & DeYoung, R. (1993). 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(1993), ―What‘s green about green consumers besides their environmental concern?‖, in Chias, J. and Sureda (Eds), Marketing for the New Europe: Dealing with Complexity, Proceedings of the 22nd Annual Conference of the European Marketing Academy, Vol. 2, Barcelona, May, pp. 1611-13. Henion, E.K. and Wilson, W.H. (1976), ―The ecologically concerned consumer and locus of control‖, in Henion, K.E. and Kinnear, T.C. (Eds), Ecological Marketing, American Marketing Association, Chicago, IL, pp. 131-44. Hines, J. M., Hungerford, H. R., & Tomera, A. N. (1987). Analysis and synthesis of research on responsible environmental behavior: A meta-analysis. Journal of Environmental Education, 18, 1-8. Hines, J. M., Hungerford, H. R., and Tomera, A. N. (1986). Analysis synthesis of research on responsible environmental behavior: A meta-analysis. The Journal of Environmental Education, 18(2), 1-8. Hueber, G. (1991). Americans report high levels of environmental concern, activity. Gallup Poll Monthly, 307, 6-12. Hungerford, H. R., and Volk, T. L. (1990). Changing learner behavior through environmental education. The Journal of Environmental Education, 21(3), 8-21. Hwang, Y., Kim, S and Jeng, J. (2000). Examining the causal relationships among selected antecdents of responsible environmental behaviour, Journal of Enviornmental Education, v 31 (4), pp. 19-24. Kohut, A., & Shriver, J.(1989). Environment regaining a foothold on the national agenda. Gallup Report, 285, 2-12. Loundsbury, J.W. and Tournatsky, L.G. (1977), ―A scale for assessing attitudes toward environmental quality‖, Journal of Social Psychology, Vol. 101, pp. 299-305. Maloney, Michael P., and Michael P. Ward. 1973. "Ecology: Let's Hear from the People: An Objective Scale for the Measurement of Ecological Attitudes and Knowledge." American Psychologist 28 (July): 583-586. 639 Martin, B. and Simintiras, A. (1995). The impact of green product lines on the environment, Marketing Intelligence and Planning, 13 (4), pp. 16-23. Moore, K. (1993). An emergent model of consumer response to green marketing, Marketing for the New Europe: Dealing with Complexity, Proceedings of the 22 nd annual Conference of the European Marketing Academy, 2 (May), Barcelona, 955-74. Nair, C. (1993), ―New environmental trends and the challenge to industry in Asia‖, TEI Quarterly Environment Journal, October-December, pp. 12-23. Newhouse, N. (1990). Implication of attitude and behavior research for environmental conservation. The Journal of Environmental Education, 22(1), 26-32. Ottman, J. (1992). Sometimes consumers will pay more to go green, Marketing News, 6 July, p. 16. Schlegelmilch, B.B., Diamantopoulos, A. and Bohlen, G.M. (1994), "The value of socio- demographic characteristics for predicting environmental consciousness", in Park, C.W. and Smith, D.C., Marketing Theory and Applications: The Proceedings of the 1994 American Marketing Association's Winter Educator's Conference, Vol. 5, AMA, Chicago, IL, pp. 348-9. Schwepker, C., & Cornwell, T. (1991). An examination of ecologically concerned consumers and their intention to purchase ecologically packaged products, Journal of Public Policy and Marketing, Vol. 10 (Fall), pp. 77-101. Seligman, C.M., Kriss, M., Darley, J.M., Fazio, R.H., Becker L.J. and Pryor, J.B. (1979), ―Predicting summer energy consumption from householders‘ attitudes‖, Journal of Applied Psychology, Vol. 1, pp. 70-90. Shrum, L., Lowrey, T., & McCarty, J. (1994). Recycling as a Mark-Sting Problem: A Framework for Strategy Development, Psychology and Marketing, Vol 11 (July- August) pp. 393-416 Shrum, L., Lowrey, T., & McCarty, J. (1994). Recycling as a Mark-Sting Problem: A Framework for Strategy Development, Psychology and Marketing, Vol 11 (July- August) pp. 393-416. Synodinos, N.E. (1990), ―Environmental attitudes and knowledge: a comparison of marketing and business students with other groups‖, Journal of Business Research, Vol. 2, pp. 161-70. Walkley, A.M., Erikson, D. H., & Tilby, P. (1988). A profile of peace activists: Demographics, attitudes, and opinions and motivational factors. Unpublished manuscript, B.C. Psychologists for Social Responsibility, Vancouver, BC. Weigel, R. H. (1983). Environmental attitudes and the prediction of behavior. In N. R. Feimer & E. S. Geller (Eds.), Environmental psychology: Directions and perspectives (pp. 257-287). New York: Praeger. 640 NAVIGATING PROCESS OF CHANGE TOWARDS NEW TECHNOLOGY FOR AVIATION Siriporn Yenpiem Dhurakijpundit University 110/1-4, Prachachuen Rd., Laksi, Bangkok 10210
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[email protected], Mobile 0816183109 ABSTRACT This article describes the key elements of a research study in the field of Change Management (CM) and Transformational Leadership (TL).This study examines the process of change and related managerial issues with particular emphasis on evolutionary changes with significant implications for the organizations and stakeholders involved. The purpose of this article is to drive and stimulate thinking and discussion about how transportation infrastructure for air navigation service can change to new technology in this decade. The article argues that conventional analyses of current infrastructure development, driven by the number of traffic, emission and global warming to change to new technology. International Civil Aviation Organization-ICAO (1995) described the shortcomings of communications, navigation and surveillance systems around the world where the current systems do not provide sufficient support for an increase in air traffic. The new systems will be changed to new communications, navigation and surveillance systems. The problem is to discuss how to move to new technology taking into account change factors for development. A particular empirical case being outlined is that of Air Navigation Service Providers (ANSPs) which are affected by introducing new technology of Air traffic Management (ATM) Systems. This process is perceived as a significant one by the concerned actors within the ANSP. Thus, it is what this empirical process serves to illustrate in terms of the numerous traps and centers of resistance to change that are found in core area of this research. An empirical investigation involving a qualitative and quantitative approach is conducted in order to assess the efficacy of the framework during this study. Capitalizing on the illustrations and findings from the empirical study, an attempt is made to consider substance, politics and the context of change, including, the role and impact the leader plays in navigating successful change. KEYWORDS Managing change, Process of change, Transformational leadership, Resistance to change, leader as change agents, Navigating change INTRODUCTION In challenging economic times, organizations have a driving need to navigate and manage change by leaders‘ performance. To address these solutions several organizations have questioned how managing and leading change succeed. All kinds of organizations, private and public pose key challenges of change which become a defining feature in contemporary organization and are changing faster than in the past. It is a 641 contentious issue among management academics and authors. They state that organizational change is a fact of life but it is often an awkward one (Linstead and Pullen 2009). Worall and Cooper (1997) indicate that cost reduction, redundancies, cultural change and performance improvement are the most common models of change found throughout industry. The term ―organizational change‖ normally refers to alterations in an organization‘s structure, goals, technology and work functions. To survive, organizations must be able to respond to change and foster attitudes of flexibility and dynamism to manage change. Most managers find themselves being affected by pressures to change which originate elsewhere and are not under their control (Linstead and Pullen, 2009). Furthermore, the drivers of change have the potential for driving all kinds of organizations in terms of the consumption of the organization. Therefore, as an example, emission effectiveness may be driving the organization to produce new technology products and services. Why should managing the process of change be studied? To succeed in today‘s global marketplace, the situation is dramatically different from in the past. Organizations and companies in particular, have to adapt and realign themselves constantly to the fluctuating environment and have to seek opportunities and economies of scale for increasing profits and for growth purposes. This is not only in response to competitive and technological pressures but also in anticipation of managing change (Kerber, and Buono, 2005). Organizations depend critically on the capital markets and the pressure for effectiveness which characterizes the corporate world today. ―Change‖ has become a key issue on its own. An organization which handles and adapts itself successfully to change stands a greater change of reaping the rewards. That is the reason why leading change has become critical. Why should leadership in the process of change be studied? The term, leadership can be interpreted differently by various people leading to a certain degree of confusion which is created by attempting to derive the meaning in a variety of contexts (Northouse, 2004). A talk may be made about leading a meeting, a discussion, a market, or a tour. To understand the meaning of leadership, the confusion arising from contextualising the word is required to be established. For example, when one talks about leading a meeting, the meaning of leadership is portrayed from the chairperson or somebody who facilitates it. With respect to leading a tour, a closer consideration is given to the tour guide. However, leading a market may employ a leader in a very real sense as the top player, unlike in these two previous examples. This shows that leaders should have qualities which may not be easily possessed by other players or managers (Daudi, 2009). The majority of researchers and authors working on leadership (Bennis and Nanus, 1985) concentrate on what it means to be a leader in terms of being at the top of a group hierarchy such as the CEO, President, Chief, Boss, Team Leader, Managing Director etc. Consequently, there is a tendency that individuals overlook the use of the term. Whatever is said about leadership, every usage focuses on one person as a central figure. Therefore, that particular person pushes us to do things which we would not usually do otherwise. In view of this, the biggest question and test imposed upon us is whether we can define leadership or a leader as whoever moves or influences other individuals (Northouse, 2004). In general, such a definition is too all-inclusive. This can be explained by the fact that Northouse considers 642 that individuals may not wish to regard teachers, sales staff or our uncles and aunts as leaders simply because they succeed in persuading us to do our homework, to buy certain items or watch certain educative programmes on television. The reason is that leadership is a group function, involving a player who is successful in bringing people together for a common purpose (Northouse, 2004). Technology Change in Air Transport: An Empirical Case This research concentrates on the air transport industry which is one of the fastest growing sectors of the world economy (International Civil Aviation Organisation (ICAO), 2005). The continuing growth of aviation places increasing demands on airspace capacity and emphasizes the need for the best use of the available airspace. The International Air Transport Association (IATA) reports that air traffic volumes of air traffic have improved after an economic crisis in all regions for 2010 IATA‘s industry (IATA, 2009). IATA also anticipates that air journeys will expand and about 10,000 new commercial aircraft will enter service over the next 10 years, involving a still larger burden on an already stained airspace system. It could potentially result in more and longer delays of flights and the possibility of more air traffic accidents. To prevent these burdens from a higher traffic growth rate the U.S. Federal Aviation Administration (FAA) and European Organization for the Safety of Air Navigation (Eurocontrol) have been working to establish a new satellite-based airspace system guaranteed to make flying more efficient while maintaining safety. An important process of ensuring aircraft safety and efficiency is to optimize the flow of traffic, cost effectiveness of flight operations and reduce conflicts of air traffic management. ICAO (1995) described the shortcomings of communications, navigation and surveillance systems around the world as amounting to many factors as shown in figure 1 Therefore, the particular empirical case being examined in this thesis is the Air Navigation Service Providers (ANSPs) which are affected by the introduction of a new technology of Air Traffic Management (ATM) Systems now and for the future. ―The ATM environment, like so many other environments today, is driven by safety and increasingly by commercial or personal outcome expectations‖ (International Civil Aviation Organisation-ICAO, 2005). In 1991, the ICAO Council endorsed future air navigation systems concepts, which came to be known as the ―communication, navigation and surveillance/air traffic management- CNS/ATM systems‖ (ICAO, 2005) The particular empirical cases of data for this research are concerned with the Air Traffic Management (ATM) Systems for Air Navigation Service Providers (ANSPs) in developing countries, such as Thailand (main data), Lao Burma, Cambodia, Nepal, Indonesia, Philippines and Mongolia. These countries are affected by the introduction of a new technology for Air Traffic Management (ATM) Systems. This research also received some insights involving ATM systems from Swedavia, Swedish consultants that are concerned with implementing the new system in Sweden and Norway. Figure 1 presents a transformative pathway to drive new technology. The navigating process is perceived as a significant one by the concerned actors and illustrates causal layered analysis in air navigation in the future. The causal layered analysis method is related to the air navigation service as shown in figure 1 where Inayatullah‘s model (1993) is used to analyze the preparation and development of a process of change for the air navigation service providers. 643 FIGURE 1: APPLYING CAUSAL LAYERED ANALYSIS IN A TRANSFORMATIVE PATHWAY OF AIR NAVIGATION Source: Developed for this research based on a literature review and interviews 4. The Myth/ Metaphor level Evolutionary rather than a revolutionary approach. Conclusion: Navigating the change related to new technology is guided by transformational leaders. Solution: Required to move towards new technology for seamless sky &free flight operation. Remarks New technology such as, PBN = Performance Based Navigation ADSB =Automatic dependent surveillance broadcast 1. The litany Level (Level of problems) Problems (Air Traffic Management) Demand (D) more than Supply (S1+S2+S3): D = Air traffic is increased at all International airports in Thailand. It is constantly expanding in every region elsewhere. S1 = Voice channel capacity problem, airspace capacity problem and traffic delay, S2= Limitations of present Communication, Surveillance and Navigation Systems, S3 = ANSP workload. Conclusion: Safety & efficiency are reduced in air transport industry. Solution: Driver for change Surveillance and Navigation Systems 2. The social science analysis level -The propagation limitation of current line of sight system; -The difficulty, caused by a variety of reasons, to implement the current CNS system and operate it in a consistent manner in many parts of the world; (Galotti, 1999; ICAO, 2005) -The limitations of voice communication and the lack of digital air to ground data interchange systems to support automated systems in the air and the ground (ICAO, 2005) Conclusion: In-depth analysis for new technological, economic, environmental and political causes. Solution: Integrated approach for systemic solutions. 3. The discourse analysis /World view Level -New manufacturers attempt to conduct in-depth analysis for creating new technology and Committee constituted by ICAO -council to deal with ATM systems such as PBN, ADS-B and Communications. Conclusion: Conference on awareness of future goal Solution: Transformation to new technology and in rethinking in regulations and procedures. From the past & current To the desired future state ATM systems, employing digital technologies, including satellite systems together with various levels of automation, are applied in support of a seamless global air traffic management system (ICAO, 2005). Conclusion: For a change success, leaders embrace the existing intelligence and shift behavior as well as communication to transformation to a more sustainable state. Air Transportation & Air Traffic Management are developed as follows: - Standard systems & regulations for all countries; - Seamless Sky& Free flight Operation; - Increased safety & efficacy worldwide; - Benefit for ANSPs & Users. Process of change 4. Stabilisation Phase 3. Action Implementation Phase. 2. Preparation Phase 1. Recognition Phase Via navigating process of change by transformational leaders. 644 THEORETICAL FRAMEWORK AND CONCEPTUAL FRAMEWORK This study aims to present an understanding of the process of change which includes explicitly the leadership perspective and the key concepts of change. This study indicates what is related to leading change and why a transformational effort might fail. Therefore, the study presents the phases in the process of change which can be identified and what role and impact are played in the process by the leader. The study concentrates on the fundamental role of leadership during the process of change, through which actions transformational leadership apply in practice. THE PROCESS OF CHANGE Within the change process models of this study, there are many differences, nuances or refinements to the existing concepts. However, some similarities between the various authors‘ approaches can also be found. 1. Recognition Identification Phase Before any change is planned or implemented, the leaders should recognize if there is a need for change in the organisation. This aspect is important because they have either the option to act or react to the environment. During the Recognition Phase, the need for change has to be identified by the organisation as soon as there is a sign that there is something wrong. The change leader has to start searching for the reason for the deficient situation. This is as a major step in the change process because it is necessary to identify the need for change properly (Linstead & Pullen, 2009). 2. Three Main Recurrent Stages in Change Process This research identifies three main recurrent stages after studying the process of change and describing them as: Preparation, Action and Stabilisation (See details in figures 1, 2, 4 and 5). These elements are discussed below: 2.1 Preparation Planning Phase Preparation, authors agree with the fact that change has to be planned before being implemented in the organisation. If this is not the case, change efforts will be unfocused, scattered and set on unimportant issues. The problem of a not well-planned change process leads often, if not always, to ineffectiveness, confusion and resources wasted. Kotter (1996) puts the idea of planning a vision at the beginning of the process of change in order to encourage employees to embrace it more easily. The preparation planning phase is indentified by the study of the process of change. The Planning Phase is characterized by developing strategies on how to solve the problems identified before preparing the employees for change. First, a well-thought out planning process is needed for the effective implementation of change. Planning should be taken seriously because it will be the guideline of the process of change. If a vision is clear, well communicated and if people consider it makes sense, commitment and motivation are more likely to follow. To reduce resistance, it is advisable to have first persuaded people of higher ranks in order to use their power to persuade the people at lower levels. Therefore, making 645 the people part of the process of change is vital. In this period it is, furthermore, advisable to take the corporate culture of the organisation into account. De Wit and Meyer (2004) argued that the stronger the organisational culture is, the more efficient in terms of performance it is. However, the drawback is that a stronger organisational culture makes it more difficult and rigid to change. A strong corporate culture cannot be shifted suddenly and it takes time to adapt it to the change. 2.2 Action Implementation Phase Action: after planning and the design have been established, the urge for action is needed to implement the change. However, uneasiness and instability are common during this step. Lewin stated that during the ―transition‖ phase, the change occurs. Uncertainty and confusion overwhelm the organisation at all levels. The employees understand that the old order is being modified but do not have a clear picture of the new one (Burke, 2002). Schein asserts that in order for people to move to the second step of the change process which is to actually change, they have to be sure that the process will not trigger feelings of embarrassment, humiliation or loss of face and self-esteem (Burke, 2002). Members of the organisation have to feel secure psychologically. In other words, they must have no fear of punishment or retribution by embracing the change. According to Bridges (2003), people have to get used to the change and have to identify themselves with the new situation. To them, it is obvious that the change implemented triggers uneasiness and that it is a necessary phenomenon in all change processes (Bridges, 2003). The Action and Implementation Phase is a step in the study of the process of change related to the application of the general planning which means action and involvement. This is the time for making the change itself. This phase takes some time- possibly months or even years. The main characteristic of that phase is the period of instability inherent in the process. Therefore, the resistance towards the implementation can be increasing. This is also due to the fact that more and more people are getting involved and engaged in the process than in the planning phase. The rigidity is an unavoidable aspect of the process of change and can be lowered to a certain extent through good communication and good preparation. Therefore on the leadership dimension, communication and motivation are more important than ever and are deeply connected. It is important to be present, visible and available for the employees and to fully commit to the task. The change team can support the leader‘s action in fulfilling these tasks. If the change team consists of other change leaders some of the tasks can be delegated to other team members. They can, for example, help to communicate and to motivate in their hierarchical levels. In order to motivate, the change leader and his team must support and encourage the people within the organisation and attempt to give them inspiration to keep things moving forward in a positive way. If the people do not feel supported, uneasiness and stress will appear and the change is likely to fail because the people would rather go back to the previous system. The ability of communicating a vision in an organisation is of the utmost importance for the leader because it underlies what is necessary to achieve that vision. The leader has to give sense to the audience and that it is another key aspect for involvement and motivation. Furthermore, changes in planning can appear at any moment of the implementation. In this case, the company has to step back to the planning phase. 646 2.3 Stabilization Phase Stabilization: authors on change agree on the importance of stabilizing what has been changed once change has been implemented. Lewin (1948) and Schein (1995) indicated this important aspect of the process in their respective ―freezing‖ or ―refreezing‖ steps (Burke, 2002). According to Lewin, the implemented change cannot be allowed to ―die or fade away‖. Kotter (1996) emphasizes the continuity of the implemented change at the end of the process. The change agents have to make sure that the employees‘ behaviour is really changed and that it will continue to be so later. He insists on the constant checking of the implemented change afterwards and also asserts that the goal for every process of change should be the implementation of long-lasting and deep transformation. Anderson (2001) also shares similar views as Kotter (1996). This final step should trigger the creation of a system which refines and improves the new state continuously. Learning from the change process and establishing the best practices for change have to be taken into consideration. Anderson and Kotter‘s approaches definitely favour long-run constructive change. Kotter‘s approach of changing the people‘s feelings in order to get change done seems to be a completely new approach, but it is not. For the application of deep lasting change, the change leader should try to change the employees‘ minds not just their behaviours (Burke, 2002). A full acceptance and commitment towards the new situation is necessary to accomplish change in the long run. Bridges (2003) say that people at the end of the process of change are waiting to follow the ones who have already adopted the new state of mind. This is an interesting psychological aspect because the employees, in their fear/hate of uncertainty, will observe others first and then, decide to move with them when they feel they do not have any other choice. The Stabilization Phase in this study can overlap with the implementation phase as well due to the fact that in some parts of the organisation the implementation phase can be completed earlier than in other parts. The stabilization phase is characterized by the assessment and the evaluation of the change process as well as checking and controlling the success of the change. THE REOLE OF LEADER IN CHANGE PROCESS To develop this research, the researcher studied what defines a transformational leader and what their additional abilities are that move their organisations toward a new identity. This study found that all successful leaders must have an inspirational influence. Going through leaders‘ views, the most relevant element related to inspirational motivation is commitment. Intellectual stimulation is the primary step to stimulate followers‘ minds to make them understand the business (Avolio & Bass, 2002). They consider individuals by recognizing their intrinsic characteristics, to pay attention to personal and professional development of each team member. Therefore, the component of a transformational leader is studied: Inspirational Influence, Intellectual Stimulation, Individualized Consideration and Inspirational Motivation. The tangible elements which characterize each of the transformational components are studied and made more concrete. This study makes a parallel between transformational leadership and other factors which are indirectly linked but which have a direct influence on transformational leaders and their followers. 647 TRANSFORMATIONAL LEADERSHIP The main characteristics of a transformational leader are: being charismatic, visionary, dynamic, creative, trustworthy and inspiring. Consequently, this approach combines the features of a change agent with the concepts of leading change. The role of leaders is to create a structure which is able to respond and adapt to change. In those situations, transformational leadership is seen as a successful leadership style. To support this concept, Ropo (1989) states that transformational leadership activities which are required mainly to change things in the organisation. Transformational leadership aims at reaching big changes in the organisation. House and Shamir (1993) argued that transformational leaders transform ―the values, preferences, and aspirations of followers from self-interest to collective interests‖ (as cited in Chemers, 1997, p.89). An analysis of Coleman et al. (1995) summarized the outcome of 27 different studies related to leader style; the result showed that subordinates see transformational leaders as the leaders for managing change. The Four Components of Transformational Leadership In order to characterize a transformational leader, Bass (1985) proposed four factors: charismatic leadership or idealized influence, inspirational leadership or motivation, intellectual stimulation, and individualized consideration. Subsequently, Bass and Steidlmeier (1999) rethought these four factors and provided further explanations. These four factors became the four components of transformational leadership and were renamed: Inspirational Influence, Inspirational Motivation, Intellectual Stimulation and Individualized Consideration. First, leadership is idealized; second, leadership inspires the followers; third, transformational leaders are able to stimulate intellectually their followers; and fourth, leaders consider followers as individuals. The four, transformational leadership components are summarised as: Inspirational Influence described leaders who act as mentor or role-models for followers, Requiring the vision to set a standard and vision. Inspirational Motivation described leaders who can communicate with clear expectations, goals and objectives, inspiring them through motivation and using vision for commitment to change. Intellectual Stimulation described leaders who stimulate followers to be creative and innovative, question assumption and seek differing perspectives when solving problems. Individualized Consideration described leaders who coach, listen to others and promote self development. The results of this study are that many successful change leaders revealed actions which are related to transformational leadership (figure 4 and 5). This shows that leaders and followers evaluate differently the components of transformational leadership and their elements. The research also shows that transformational leadership is an actual issue, as it has very positive effects both from a personal and from an economic viewpoint. If leaders want to improve their leadership style, they have to be aware of the fact that their present way of influencing their followers is not necessarily the same compared to that which followers perceive as optimal. Thus, leaders should first invest time in getting to know the characteristics and the 648 individual preferences of their followers. One review found that employees have to be motivated to be more creative and innovative which should lead to the creation of new control mechanisms (Alvesson and Willmott, 2004). A transformational leader is supposed to create an atmosphere for motivating innovation and creativity. RESISTANCE TO CHANGE Generally, this study found different causes of resistance to change. Due to the fact that a change process always involves people, this study has to consider psychological resistance towards change as well as attitudes towards change. The fear of the unknown and instability is a common and natural human feeling that a leader has to deal with. Resistance can be, moreover, caused by political moves within the company. The parts within the company which will lose more than they will gain (privileges, authority, money, etc.) can cause problems as well. Also, the corporate culture of a company will play an important role when implementing change. The stronger the organisational culture, the more difficult it is to change. It can become harder to implement change if the new way of doing this is against the existing corporate culture (De Wit and Meyer, 2004). A leader must consider these critical aspects in order to implement a lasting and effective change. Resistance of Management Change and Transition The following challenging complacency approaches for accomplishing change management that was suggested by Beer and Norhria (2002) is shown below: 1. Organization‘s competitive situation to generate discussion with employees about current and future problems. 2. Communicate and participate with employees in order to create opportunities for employees to inform their dissatisfaction and problems. 3. Create dialogue on the data with employers to aim for a joint understanding of company problems. 4. Set high standards and expect people to meet them. SUMMARY OF CONCEPTTUAL FRAMEWORK FINDINGS The necessary link between the change process and leadership along with the role of Transformational leadership in the change process, have provided the motivation for conducting this research. Thorough reading and understanding of the theory of change management, transformational leadership , the leadership change model does not make a strong enough link between the process of change and leadership. However, the literature does indicate the importance of the leader‘s role in facilitating the process of change. But the specific role of the leader in this process is not explicit in the specific phases of the change processes and the impact he/she can have within the process. This research is motivated by this issue. The study concentrates on gathering the key concepts of change and focusing on the fundamental role of leadership during the process of change. FIGURE 2: CONCEPTUAL MODEL OF MANAGING THE PROCESS OF CHANGE Conceptual Model of managing the Change process 649 DATA AND METHODOLOGY In order to find the answer to research questions, this study has adapted methodologies which build a research model. A research model employed for driving this research is through a practical case, focus groups, individual interviews and questionnaires which are as follows: 1. Understanding and Pre- understanding Pre- understanding is the knowledge and experience that the researcher has gained before starting to conduct the research. The aim is to use the pre-understanding to get the understanding answers to the research questions (Gummesson, 2000). FIGURE 3: LEVELS OF RESEARCH Set up the levels of analysis to collect the data 5 Discourse Perception Action Investigate the institutionalized way of speaking Data collection from Examine data related to people‘s understanding their environment Discourse Perception Action Investigate through discussion interview and interaction discussion A. Safety B. Quality C. Productivity Cost Effectiveness Transformational Leadership A. Inspiration Influence B. Inspiration Motivation C. Intellectual Stimulation D. Individualized Consideration A. Considering the substance of change B. Considering the politics of change C. Considering the context of change Goals Develop, Improve Performance and Capacities New Technology Change Management New Achieve Environment Success Yes No Focus Process of Change Recognition Identification Phase Preparation Planning Phase Action Implementation Phase Stabilization Phase Source: Developed for this research based on a literature review and interview 650 Source: Developed for this research based on a literature review and interviews There are three levels: Discourse, Perception and Action. First, the researcher is connected to the action level to deal with investigations which take place directly within the place of interest (organisation) through direct discussions, interviews and interactions as shown in figure 3. The result is the collection of objective data based on facts. Second, the perception level examines data related to people's understandings of their environment. This level of analysis is subjective being influenced by people's personal feelings, opinions and views about their organisation. For this reason, sense-making is part of this level. The perception level is interesting for researchers because they can analyze how people are influenced, how they react and how they interact in an organisational context according to their personal concerns. In addition, the perception level does not have the objective to describe the reality through the collection of facts. Rather its aim is to understand what is important for people and therefore which are the behaviours a leader has to adopt in order to influence them. Third, the discourse level aims to investigate the institutionalized way of speaking. The way people express themselves using symbols, rhetoric and stories influences the behaviour of others in the work place. According to these three degrees of analysis, the collection of data is more or less abstract-oriented. Through the questionnaires, the interviews and the cases I analyze people's perceptions concerning leadership and more precisely concerning the transformational components by developing grounded theory. To run and to analyze empirical data, techniques and procedures are employed to develop grounded theory as proposed by Strauss and Corbin in 1998, Corbin and Strauss in 2007. This method is seen as the right way to build a theory which emerges from data collection and it takes into account the strong connection which exists between gathering data, analyzing data and building a theory. Consequently, for preparing my data collection concerning the interviews and the questionnaire following Strauss and Corbin‘s suggestions (1998). 2. The method used in this research is the so called ―Grounded Theory‖. The general idea of this approach is as follows: 1. The researcher‘s theoretical framework and intellectual orientation are vital inputs in the investigation of the study at the empirical level. However, the background and the theoretical sensitivity of the researcher should not constitute a bias in the investigation, but should function as an enhancer of the empirical sensitivity. 2. The researcher collects empirical data from the field, realizing that it represents the experiences of the actors concerned and the phenomenon being studied. 3. This data is collected, researched, organized and analyzed at the theoretical level. Key theoretical concepts are used and conclusions are made. 4. Depending on the result that emerges from the analysis, a new empirical investigation might be necessary. Investigate through discussion interview and interaction discussion interview 651 5. Thus, the name ―grounded theory‖ means literally that the developed theory in this thesis will be grounded in the real life experiences of the actors of change in the studied organisation. However, the analysis and the conclusions are also likely to be useful to any organisation embarking in a revolutionary process of change. THE DATA COLLECTION OF THE STUDY The data collection of the study is shown in table 1.The particular empirical cases of data for this research are concerned with the Air Traffic Management (ATM) Systems for Air Navigation Service Providers (ANSPs) in developing countries, such as Thailand (main data), Lao Burma, Cambodia, Nepal, Indonesia, The Philippines and Mongolia. These countries are affected by the introduction of a new technology for Air Traffic Management (ATM) Systems. This research also received some insight involving ATM systems from Swedavia, Swedish consultants that have been involved with implementing the new system in Sweden and Norway. The number of participants is 250. The questionnaires and interview methods are used. The study also interviewed 25 leaders in developing countries, including ANSP in Thailand and Swedavia Consultant. TABLE 1: CONTENTS OF DATA 1. On leaders/ managers/leaders‘ projects/controllers/pilots background and characteristics 2. Overview of the organisation 3. Need for change 4. Adoption of change 5. Change process in ANSP organisation 6. Step in process of change (planning, implementation, control of the process of change) 7. Control of the process of change 8. After the implementation of change 9. Actions by transformational leadership 10. Transformational components 11. Perspectives of Transformational leadership, controllers and pilots 12. Safety level of ANSP 13. Quality of airspace management 14. Productivity performance Source: Developed for this research based on literature review and interviews The Drivers for Change The navigating process of change, the impetus for change is the force or pressure which drives for change. As a result of empirical interviews, leaders indicate that the force comes from two sources, internal and external driver for change. The driver for change, the speed of change, the long period plan, and the delay for change are factors which affect the influence in processing of change. Price (2009) indicated that drivers for change often present a complex picture from which people in organisation have to select their priority. THE EMPIRICAL RESULTS OF ANALYSIS AND DISCUSSION From a review literature, it was found that the role and impact of leadership within the process of change, that the transformational leaders have the potential to influence the organisation in the both positive and negative ways (Morgan, 1997). Transformational leaders 652 are required to discuss with employees about current and future problems, create dialogue on the data with employers to aim for a joint understanding of company problems to reduce resistance (Beer and Nohria, 2002). Therefore, the followers‘ perspective about how they feel and affect them would refine the good orientation about change projects in organisation. CHANGE MANAGEMENT (CM) PHASES AND ACTIVITIES ARE IDENTIFIES Participants described the most crucial CM activities for navigating leaders in the process of change. The data is divided into four main phases which are identified in conceptual framework of change process. They are Recognition & Identification Phase, Preparation & Planning Phase, Action & Implementation Phase and Stabilization Phase. The activities are categorized by the grounded theory research method according to the main participants who are composed of: - Project leaders - Transformational Leaders (senior leaders – TE) - Staff members or followers Figure 4 presents the result where the activities and steps in the process of change are identified. The dimension in figure 4, summaries the research results related to focusing on project leaders, senior leaders and followers in organizations. Providers will be included in a description of how these perceptions identified ,influenced and affected in managing the process of change. FIGURE 4: MANAGING THE PROCESS OF CHANGE Project Phases Participants Project Leaders Senior leaders Followers The Recognition & Identification Phase Prepare teamwork Establish Transformational Leaders (TE) Create awareness and persuasion The Preparation& Change plan Involve Engage Process of Change Phases 653 Planning Phase Transformational Leaders Followers The Action & Implementation Phase Transfer knowledge Coach Transformational Leaders (TE) Train Followers The Stabilization Phase Support Change Monitor Progress Understand Followers Source: Analysis of field study THE LEADER’S ROLE IN CHANGE PROCESS To develop this research, the researcher studied what defines a transformational leader and what their additional abilities are that move their organisations most toward another identity. This study found that all successful leaders must have an inspirational influence. Going through leaders‘ views, the most relevant element related to inspirational motivation is commitment. Intellectual stimulation is the primary step to stimulate followers‘ minds to make them understand the business (Avolio and Bass, 2002). They consider individuals by recognizing their intrinsic characteristics, to pay attention to personal and professional development of each team member. Therefore, the components of a transformational leader are studied: Inspirational Influence, Intellectual Stimulation, Individualized Consideration and Inspirational Motivation. The tangible elements which characterize each of the transformational components are studied and made more concrete. This study makes a parallel between transformational leadership and other factors which are indirectly linked but which have a direct influence on transformational leaders and their followers. The results of this study are that many successful change leaders revealed actions which are related to transformational leadership. It shows that leaders and followers evaluate the components of transformational leadership and their elements differently.. The research also shows that transformational leadership is an actual issue, as it has very positive effects both from a personal and from an economic viewpoint. If leaders want to improve their leadership style, they have to be aware of their present way of influencing their followers is not necessarily the same compared to what followers perceive as optimal. Thus, leaders should first invest time in getting to know the characteristics and the individual preferences of their followers. One of the reviews study found that employees have to be motivated to be more creative and innovative which should lead to the creation of new control mechanisms (Alvesson and Willmott, 2004). A transformational leader is supposed to create an atmosphere motivating innovation and creativity. Transformational Leaders (TE) aspect and Activities, participants described the most crucial TE activities for navigating leaders in process of change. The data was separated into 4 main phases which were identified in process of change. They are Recognition & Identification Phase, Preparation & Planning Phase, Action & Implementation Phase and Stabilization Phase. The activities and role were categorized by using grounded theory research method according to the main participants who are composed of: Change management & Transformational leadership Activities 654 - Project leader - Transformational Leaders -TE (senior leaders who sponsor the change) - Staff members or followers The result is the transformational leader‘s aspects, roles and activities in terms of the process which are identified as shown in figure 5. The figure is a diagram illustrating the roles and impacts that the transformational leader plays in each phase of the change process. FIGURE 5: TRANSFORMATIONAL LEADERS’ ASPECTS, ROLES AND ACTIVITIES With project Leaders With Senior Leaders With Followers The Recognition & Identification Phase Acquire project leaders Create CM & TL support Create awareness & persuasion The Preparation & Planning Phase Develop change management &transformational leadership plans Develop sponsorship Engage & share vision and understand corporate culture The Action &Implementation Phase Provide direct support by motivate & influence Manage resistance Train &Educate followers by motivate, influence & coach. The Stabilization Phase Sustain change process by assessment & evaluation Monitor progress & manage resistance Strengthening & reward Source: Analysis of field data. According to De Wit and Mayer (2004), the process of control can be either made at the top or at the bottom. Furthermore, Kotter (2002) claimed that it was not possible that just a few people on the top can be the change agent. The people at every level and in every department can support the change leadership. From the understanding of change, the data shows that the change process succeeds or fails in implementing change depending highly on the people themselves. After a change occurred, the process of control can be referred to either at the top or at bottom to drive at the bottom of organization. The study found that the best way for change process should be for staff at all levels who desire change. The study agrees with Alexander (2008) who identified the Swedish leadership style of getting everyone to agree at all levels of decision-making. This study provides the new model focusing on all participants (project leaders, transformational leaders–senior leaders and staff or followers) their attitudes, expectations, perceptions, P r o c e s s o f C h a n g e P h a s e s Change management & Transformational Leadership Activities 655 intentions, desires and behaviours while implementing changes. The change process model of this research is derived from data collection which is the perspective, share-vision and feedback from all levels (See details in figure 5). CASUAL LAYERED ANALYSIS OF NAVIGATING LEADER FOR TRANFORMATIONAL The study uses the Casual Layered Analysis of Navigating leaders for being transformational in the process of change to understand an important role of a leader is how it affects followers in the process of influencing change in an organization view. Inayatullah‘s model (1993) is used to analyze the aspect of individual, organization, state and worldview for air navigation service providers as shown in table 2. The analysis was divided into four layers which were identified what the people want. They are Litany layer, System layer, Worldview layer and Mythology layer as shown in table 2. CONCLUSIONS Concerning resources, the main study is of the existing literature. This study uses the literature to define the research and also to prepare for the interviews and the questionnaire. In general, data gathering is influenced by several aspects. First, this study has to choose which groups and which environments are useful to find empirical data related to the research questions. The second challenge is to select the method which is used to collect the data. As mentioned at the beginning of the work, this thesis is related to the perception level. To collect and to analyze empirical data, techniques and procedures are employed to develop grounded theory as proposed by Strauss and Corbin in 1998, Corbin and Strauss in 2007. Interviews and questionnaires are the most efficient tools to detect peoples‘ perceptions and therefore to answer the research questions. Within the change process models of this study, the study found that there are many differences, nuances or refinements to the existing concepts. Some similarities between the various approaches can also be found. However, some of them are difficult and intricate in practice. This study has provided the best techniques for breaking into the four phases of change model which can be identified based on both the empirical results and a theoretical review. This process is divided as Recognition and Identification Phase, Preparation and Planning Phase, Action and Implementation Phase as well as Stabilization Phase to help make sense of change. This study also has an implication for many stakeholders involved in implementation of new technology. The activities are categorized by the grounded theory research method according to the main participants who are composed of: - Project leaders - Transformational Leaders (senior leaders – TE) - Staff members or followers The study identifies various theories to change management and transformational leadership. These theories show that there is no right or wrong for employing in change process. However, the importance of transformational leadership shows that it has influence on participants without showing in each step how to employ in the change process. From the result of this study, the concept of Theoretical Framework, Conceptual frame work and Models can be summarized. The dimension of transformational leadership needs a strong link to the change process for achieving change management. To identify the key concepts of change and focusing on the fundamental role of leadership, management during the process of 656 change is necessary. This study uses Casual Layered Analysis of Navigating leaders for a transformational in the process of change to understand an important role of a leader is how it affects followers in the process of influencing change in an organization as shown in table2. This study points out the necessary link between the change process and leadership along with the role of transformational leadership in the change process. Consequently, this study identifies all the steps in the change management process of the change model. The change model of this study is divided into four phases, including three categories of transformational leadership as described above. The results identify the key concepts of change and focusing on the fundamental role of leadership during the process of change. The study accepts that leaders would use their power to direct others through a definite course of action in achieving a goal. The top-down and bottom up managements are used for managing change to drive the change as the best solutions. The study identifies two views of management in the navigating change process. These two views are organization (Top-down view) and individual (Bottom-up view) change management. Organization change management is leaders‘ perspective which looks from the top into the process of change. Additionally, individual change management is the followers‘ perspective which provides the feedback information for transformational leaders. Both organization and individual management are skills what today‘s leaders are required to have for success in change management (Hiatt and Creasey, 2003). Acknowledgement I would like to thank Professor Dr.Philippe Daudi and Professor Dr.Brian Sheehan for their advice on this paper. 657 TABLE 2: SUMMARY CASUAL ANALYSIS FOR NAVIGATING LEADER Individual (Controllers, Engineer, etc) 0rganisations’view (ANSPs) States, Regions’ view Worldview ●People recognise the problems work load, level of safety & efficiency. ●The direction of the implementation is influenced by resistance. ●Each release begins with no anticipated planning. ●Change projects create resistance which has to be broken. The change in the past why they were un successful. ●Leaders recognise the problems work load, level of safety & efficiency. No cooperation between regulator and ANSP for implementation of the CNS/ATM systems. ICAO (2009) intend to drive more rapid and comprehensive implementation new air traffic management at the national level. ●Communications about the change are timely and relevant affected & influence. ●Followers had bad image about changing in the past. ●They need more understanding about change why change is happening and why it is necessary. ●Leaders need to access and understand about new technology. Vision and commitment to change, have strong sense of purpose, trust and role model are considered for changing. ―Leaders have a vision which drives the people where they want to go‖(Avolio and Bass,2002, p.17) ●The State should recognise the problems which they have to understand, but the budget is limited. ●Regulator required the expertise to achieve higher performance. ICAO (2009) is developing a new course for state regulators on operational approval. Having assistance from the project leaders, project infrastructure, training specialists to create a supportive environment. Employees have received data about new technology very fast. Therefore, employees need support from leaders‘role by articulating a compelling vision in the future. Make followers involve activity and communicate with clear expectation, goals and objective. Leaders who have inspirational influence are seen as ―a mentor‖ by their Follower. Vision and commitment to change, have strong sense of purpose are considered for changing. Stimulating innovation is considered a key factor The participation is considered among regulator, ANSP and stakeholders. Navigating directions for managing change by each state should be prepared. ICAO (2009) indicated that the Global strategic planning processes now in place. Employees have to be motivated to be more creative and innovative which should lead to the creation of new control mechanisms (Alvesson and Willmott, 2004). control mechanisms Transformational leaders have to provide new direction, new inspiration, and new behaviors for organization. Key issues for states are the requirement to have qualified personnel who can certify airlines for new procedures. (IATA, 2009) A driver for change is significant. Training and assistance are required in order for states to bring their new capabilities. E x t e n t t o w h i c h p e o p l e a g r e e w h a t t h e y w a n t Extent to which people agree on cause and effect 658 REFERENCES Alexander, J. (2008). The Hidden Code of Swedish Leadership [Electronic Version]. Retrieved Feb 22, 2010, from http://www.johnalexarder.se/newsleeter/june2009/newsletter02.htm Alvesson, M., & Willmott, H. (2004). Identity Regulation as Organisational Control Producting the Appropriate Individual. In M. J. Hatch & M. 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Thousand Oaks, London: Sage Publications. Price, D. (2009). The Context of Change In D. Price (Ed.), The Principles And Practice of Change (pp. 3). UK.: Price, Deborch. Ropo, A. (1989). Leadership and organization change. Tempare: University of Tempere, Finland. Shein, E. H. (1995). Kurt Lewin‘s Change Theory in the Field and in the Classroom, in www. SOL-NE ORG/RES/WP/10006 htm. Accessed Mar. 21, 2010. Strauss, A., & Corbin, J. (1998). Basics of qualitative research: Techniques and procedures for developing grounded theory, Thousand Oaks: Thousand Oaks, CA Sage. Worall, L., & Cooper, C. L. (1997). The Quality of Working Life, Corby: Institute of Management. Research Report, London. 661 WHO HAS THE POWER? A STUDY OF DECISION-MAKING INFLUENCE IN AMERICAN FAMILIES Dr. Roger J. Baran Associate Professor Department of Marketing College of Commerce DePaul University 1 East Jackson Blvd Chicago, IL 60604-2287 312-362-8302
[email protected] 662 WHO HAS THE POWER? A STUDY OF DECISION-MAKING INFLUENCE IN AMERICAN FAMILIES Sociologists have oftentimes measured ―power‖ in families by determining which spouse makes decisions (Blood and Wolfe 1960; Bond and Peery 1971; King 1969). Marketers have also been interested in spousal decision-making, for the decision-maker role could serve as a basis for market segmentation if it is assumed by the same spouse across the population or within specific subgroups. Does this occur? Marketers and sociologists approach this issue differently. Marketers primarily stress product-related rather than family-related characteristics as explanatory variables of marital role structure. As a result, they expect to find a highly differentiated role structure in which marital roles are assumed to change in conjunction with a change in the product or service under consideration. Marketers, therefore, expect to find few subgroups in the population where marital role structure in the decision-making process (suggestor, information-gatherer, decision-maker and purchaser) is similar. Sociologists, on the other hand, assert that marital role structure is similar within many subgroups of the population. According to their Cultural & Ideological Role Theory, culture prescribes marital role attitudes and these prescribed roles determine whether it is the husband or wife who has major influence over family decisions. The impact of culture on husband-wife influence in decision making has been shown in numerous studies. Husband dominance has been found to exist in Venezuala (Green and Cunningham 1980); China (Ford, LaTour and Henthorne 1995); Hong Kong (Yau and Sin 1991); Saudi Arabia (Yavas, Babakus, Delener 1994); India (Webster 2000); Greece and Yugoslavia (Rodman 1967); and Gabon (Green et al 1983). Joint decision-making influence has been found to exist in England (Hempel 1974); Belgium, Denmark, Sweden, France, USA and West Germany (Rodman 1967); and the Czech Republic (Baran 1995). Wife dominance is said to exist in the Navajo culture and Black subculture in the U.S. (Strodbeck 1951). Subcultures can be based on nationalities, religion, race, geography and other variables. In the U.S., Webster found that Hispanic subcultural identification has a significant effect on purchasing involvement, information search, and husband-wife dominance in decision making with a shift of marital power away from the husband to the wife as the family assimilates. Research findings with respect to black families in the U.S. have not been unanimous in support for, nor in the direction of the relationship between race and its impact on husband-wife roles in the DMP. Three theories exist that attempt to explain the causes of spousal influence: Cultural and Ideological Role Theory. Resource Theory, and Involvement/Interest in the Decision. 663 Cultural and Ideological Role Expectations This theory states that marital role attitudes are affected by subculture. Marital role attitudes can be traditional—where a high degree of specialization between spouses exists with few shared activities or decisions, with the dominance of the husband apparent across most family decisions—or companionship—where there is a low degree of specialization with most activities and decisions are shared with an equalitarian balance of power across most family decisions. Authority in the family is also said to be anchored in subculture and Turner (1970) and Blood and Wolfe (1960) feel that among the various determinants of influence, authority is the most basic, for it is authority which allows either spouse to perform or delegate the performance of tasks. Traditional versus companionship marital role attitudes, and concomitant marital authority patterns, have been shown to be associated with certain social groupings such as ethnic groups (Rainater 1966A; Pettigrew 1964), social classes (Heer 1958; Komarovsky 1962) and religious denominations (Strodtbeck 1951). These social structure variables affect marital role attitudes and authority patterns which in turn are associated with task and decision behavior. Based on these theoretical expectations, the following propositions are suggested: (1) The more traditional are husband and wife attitudes toward marital roles, the more important cultural role prescriptions become in determining spousal influence; i.e., if a decision area is viewed as one which a husband should perform, the husband is likely to do it even if the wife is more competent, and vice versa. (2) The more matriarchal are husband and wife attitudes toward marital roles, the greater the wife‘s relative decision making influence. (3) The more equalitarian are husband and wife attitudes toward marital roles, the greater the tendency for roles in the DMP to be performed jointly. This tendency toward joint participation will be most pronounced when the product or service is viewed as ―neutral‖. In the U.S., automobiles are viewed as part of the male‘s domain, furniture as part of the female‘s domain, and retail bank services as either‘s domain. Control of Valued Resources Conjugal role patterns and prescribed authority are external to the family. A major study of the power structure in American families (Blood and Wolfe 1960) posits a group of determinants which are internal to the family—the comparative resources which the husband and wife bring to the marriage. They assert that once you know which partner has more resources (more education, higher SES background, greater income, more organizational memberships, longer work history, etc.) one will know which spouse tends to make most of the decisions. The basis for this lies in 664 the paradigm of exchange theory. The relative socio-economic resources possessed by one spouse vis a vis the other are compared by each and exchanged for the right to make or delegate decisions or tasks. Turner‘s (1970) extended notion of resources includes an individual‘s level of self-confidence, interpersonal techniques, and their interest in the relationship vis a vis their spouse. High levels on the first two attributes combined with a low interest level in the relationship vis a vis one‘s spouse leads to greater influence in the DMP. Resource theory is said to be applicable across cultures. In its current state, it has not been modified by prescribed cultural norms affecting marital role structure in the DMP. Conflicts exist between the predictions of Resource theory versus Cultural and Ideological Role theory. Consider a traditional family in which the wife works and has a better education and higher- status occupation than her husband. Resource theory predicts that she would have greater influence in decision making; whereas Cultural and Ideological Role theory would suggest that because this family is traditional, the husband would be more likely to have the greater influence. Empirical evidence (Blood and Wolfe 1960; Scanzoni 1971; Turner 1970) consistent with the theoretical expectations of Exchange theory suggest the following proposition: the greater one spouse‘s comparative advantage over the other in terms of socio-economic and psychological resources, the greater their relative influence in the DMP. Decision-Specific Variables The typology of resources discussed up to this point merely imply competence in decision making. Davis (l972A) and Turner (1970) have found that characteristics which relate to the specific decision or situation should be included and, in fact, may be the most important group of determinants of husband-wife influence in decision-making. A resource such as competence should increase the probability of that spouse having the major influence in that decision area or the spouses‘ relative psychological involvement with the particular decision; i.e., their interest, the perceived importance, and their perceived competence. Based upon the implicit theory contained in the marketing literature, and a few studies consistent with theoretical expectations (Davis 1972A; Turner 1970) the following proposition is suggested: the greater a spouse‘s psychological involvement with the decision area at hand, the greater that spouse‘s influence in the DMP. The three existing theories suggest diverse explanations for marital role performance in the DMP. If authority due to cultural role prescriptions is not sufficient to explain which spouse will perform various roles in a product or service related decision process, then role performance may 665 be based on spousal control of valued resources or involvement or interest with the decision area at hand. The interrelationships among the independent variables discussed thus far and their effect on decision-making influence lead to the following propositions: 1. When marital role attitudes are companionship, resources are irrelevant and whichever spouse possesses more competence with respect to the decision at hand makes the decision. 2. When marital role attitudes are traditional, competence is irrelevant, and whichever spouse feels it is their prescribed role to make the decision will make it. 3. When marital role attitudes are matriarchal, the relative resources of husband and wife will have an important effect on decision making influence. The more resources the husband is contributing to the dyad, the more influence he is able to wield in those decision areas he is interested in. Market Segmentation and Husband-Wife Roles in the Decision-Making Process: A Consideration of Race Research findings have unfortunately not been unanimous in support for, nor in the direction of, the relationship between race and its impact on who assumes the decision-maker role in the family. Many researchers have posited an association between race and spousal dominance, with black wives occupying the dominant positions in their families with respect to economic decisions and white husbands in their families (Broom and Glenn 1965; Drake and Cayton 1945; Guthrie 1970; Lincoln 1966; Moynihan 1965; Rainwater 1966A; Schwartz 1965). However, a number of researchers have refused to accept this assertion as a statement of fact (Baugbman and Dahistrorn 1968; Bridgette 1970; Hyman and Reed 1969; King 1969; Scanzoni 1971). This empirical investigation will now focus on the validity of the assertion that in intact black families the wife exercises predominant influence over major product or service decisions. Much of the research that has been done in this area of husband-wife influence within the black family has been deficient in each of the three perspectives which relate explanatory variables to decision making roles: 1. Cultural and Ideological Marital Role Expectations 666 Black attitudes toward marital authority and role patterns are often inferred but not often tested. The inference is that due to slavery (Bernard 1966; Broom and Glenn 1965; Schwartz 1965; Watkins and David 1970); black male economic instability due to discrimination (Herzog and Lewis 1961; Staples 1971; Whitaker 1967); or a combination of the two factors (Guthrie 1970; Kardiner and Ovesey 1951; Lincoln 1966; Pettigrew 1964; and Rainwater 1966A), black families have developed matriarchal structures. There is, however, little empirical evidence available on black prescribed marital role patterns and how they differ from prescribed patterns for whites. 2. Valued Resources Many studies purportedly investigating race and marital roles have confounded race with husband-wife resources--primarily socio-economic resources. There is a need to determine if the differences found between black and white marital role patterns might actually have been due to factors other than race, such as: distributional factors; there are a greater proportion of blacks in lower income groups and this distributional problem is oftentimes not controlled for (Moynihan 1965); the fact that black women have traditionally had more and better schooling than black men (Bernard 1966; Broom and Glenn 1965; Lincoln 1966; Pettigrew 1964); the frequent unavailability of black male employment (Broom and Glenn 1965; Lincoln 1966; Guthrie l963; Rainwater 1966A); urbanization and the fact that black women can oftentimes earn wages more easily than a black man in the city (Rainwater 1966A). 3. Decision-Specific Variables It has been reported, for example, that black women are more likely to shop with other women rather than their husbands; whereas white women behave just the opposite. This could be due to the fact that black families are more likely to be headed by a female than are white families (Bauer 1966). With few exceptions (Frazier 1957A; Hare 1965; Kronus 1971; Lincoln 1964) have researchers investigated black families where husbands and wives are both present. Future research in the area of black family husband-wife influence should control for the deficiencies noted in the three areas noted above. To determine the relationships between race, cultural role expectations, and husband-wife influence in the decision making process, resources and decision-specific variables should be controlled for. Method The data in this study was collected from a questionnaire personally administered to 423 couples residing in the Chicago SMSA. Since financial decision making and task performance was a major focus of the study, to be selected as respondents, the couple must have opened a checking or a savings account within the past two years. In addition, the head of household must have been currently employed and forty years old or less. Quotas were assigned on the basis of wives‘ employment status, race, and husbands‘ occupational status. Seventeen geographic areas each 667 approximately the size of two census tracts were selected from across the SNSA based on the racial composition of the area. Specific dwelling units were selected using systematic sampling with the criss-cross directory as the sampling frame. After a randomly selected start these households were called and if they met the screening criteria, the interviewer made an appointment when both spouses would be at home. Instruments were completed independently by husbands and wives. It was attempted in this research to match as closely as possible the two populations of interest, black and white families, on the pertinent demographic variables. Perfect matching was not achieved but the large sample size and use of quotas provided more than sufficient numbers after the relevant characteristics are held constant. Based on wives‘ responses only, this analysis will investigate black-white differences in aggregate terms on three variables from the schema: (1) attitudes about husband-wife authority (2) psychological interest in family financial matters and (3) decision making (in the area of family money matters). Regarding the first two variables, it was decided to develop items based on the literature which would tap an ―a priori‖ list of the relevant independent variables and their subsets shown on the schema. The item interrelationships and dimensions were then statistically determined. A total of seventy-one items were developed using a 6-point Likert scale format for the ―a priori‖ grouping of variables. A principle component factor analysis was conducted using varimax rotation and pairwise deletion of missing data. The two independent variable factors and the individual items and their factor loadings follow. Attitudes About Husband-Wife Authority Dimension (labeled MARIDEOL) is composed of twelve items--each measured on a six item scale where 1 = definitely disagree to 6 = definitely agree. The maximum possible score of 72 characterizes a highly traditional marital role attitude. Wives having such a score felt their husband had the right to be the boss, make the important decisions, and in general be the dominant and controlling family member. Wives having low scores disagreed with this role concept. MARIDEOL: Husbands Role is one of Dominance——Wife‘s role is submissiveness Score of 72 = highly traditional Score of 12 = highly companionship HWA2 (.668) Husbands should make the really important decisions in the family. HWA3 (.727) It is a husband‘s right to be more powerful than his wife. MFA2 (.574) It‘s probably true that all women are weak & need to be protected. HWA4 (.791) A husband deserves to have superior authority in most family matters. MFA3 (.616) When dealing with a man, a woman should let him get control from the 668 start. HWA6 (.710) In our family, the husband has the right to be boss. HWA8 (.597) When there‘s a really important decision in which a husband and wife disagree, the husband is most likely correct. HWA1O (.690) A wife should alw.4‘s be submissive to her husband‘s needs. HWA11 (.616) A husband should have the power to make the rest of the family do whatever he wants; after all, he gets pushed around enough at work. HWR5 (.568) Even if a wife works, it is still her job to see that the household chores are done properly without expecting her husband to help around house. HWA12 (.573) I believe that the husband has the right to control the behavior and opinions of other family members. MFA5 (.695) Women should always be submissive to their man. Psychological Involvement with Family Financial Matters Dimension (Labelled PSYINMON) is composed of five items. A maximum score of 30 indicates that the wife has an extremely high interest in staying abreast of family and institutional money matters. A score of 5 indicates no interest in these matters. . PSYINMON: Psychological Interest in Money & Security and Importance of such. Score of 30 = High interest in money and security Score of 5 = Low interest MONIMP1 (.511) It is very important to save money for a rainy day. MONIMP2 (.654) A savings acct. is one of the most important possessions a family can have. MONINT2 (.523) I consider it very important to try & keep track of how much money we spend each month. MONIMP3 (.558) One of the most important relationships a person can establish is that of having an account at a bank. MONINT5 (.477) I‘m extremely interested in the changing interest rates paid on savings accounts because they could affect my family‘s financial situation. Findings: Black-White Wife Differences on Attitudes about Husband-Wife Authority Dimension (Score of 72 = Husband Dominant/Highly Traditional Marriage Ideology Score of 12 = Companionship Ideology) Mean St. Dev. n Sig. Entire population of wives 31.7 14.1 393 669 White wives 26.5 12 215 .000*** Black wives 37.5 13.9 189 Wives currently employed 30.9 14 220 NS Wives not currently employed 32.8 14.1 173 Wives currently employed: White wives 23.8 10.9 90 .000*** Black wives 35.7 13.8 130 Wives not currently employed: White wives 28.4 12.4 123 .000*** 43.6 12.4 50 Findings: Black-White Wife Differences on Interest in Family and Institutional Money Matters Score of 30 = High interest in money and security Score of 5 = Low interest) Entire population of wives 23.1 4.5 408 White wives 22.5 4.1 221 .01** Black wives 23.6 4.8 198 Wives currently employed 23.3 4.5 224 NS Wives not currently employed 22.7 4.4 184 Wives currently employed: White wives 22.5 4.2 91 670 .03** Black wives 23.8 4.6 133 Wives not currently employed: White wives 22.5 4.1 128 NS Black wives 23.3 5.2 56 Discussion: There is a difference in black-white wives‘ attitudes concerning husband-wife authority. Black wives have attitudes which are more traditional than white wives--feeling that their husband has the right to make the important decisions (37.5 vs. 26.5). The differences between white wives and black wives is even greater among wives not employed (43.6 vs. 28.4). These are statistically significant differences at the .000 level and are the complete opposite of what one would expect if black families were characterized by matriarchal influences. In addition, there appears to be an interactive effect between race and resources (wife‘s employment). Not being employed increases the white wife‘s score from 23.8 to 28.4 but increases the black wife‘s score from 35.7 to 43.6. Black wives also exhibit a greater interest than white wives in family and institutional money matters (23.6 vs. 22.5). The difference is not large, but it is statistically significant at the .01 level. The numbers are virtually the same between white wives and black wives who are currently employed (23.8 vs. 22.5). No statistically significant difference was found between black and white wives not currently employed. Ten specific financial decisions were investigated to determine if there are differences in wife influence between blacks and whites: Who usually decides: how much money to put into your family‘s savings account? Checking account? When? (for each account) How much should be saved out of each paycheck? Whether or not you have enough money to ―splurge‖ on an expensive item you both would like to have? Who actually decided: When to open? (each account) Where? (to open each account). Response categories for six decisions included ―husband decides‖, ―wife decides‖, and ―joint‖. For four decisions, the ―joint‖ category was broken into its syncratic (―both together‖) and autonomic (―sometime husband/sometime wife‖) components. For this comparison however, only the ―wife decides‖ category is investigated. In only one decision area does the black wife have a statistically significant greater amount of influence than the white wife. This was on the question ―Who actually decided when to open the family‘s checking account?‖ (28% of black wives decided this unilaterally vs. 12% of white 671 wives.) On six of ten financial issues, white wives had higher unilateral influence than black wives although none were at statistically significant levels. These findings give no credence to black matriarchal influences. Results of this study appear to indicate that in intact black and white families which have been matched on important demographic and socio-economic characteristics, black wives do not, in fact, have greater influence in family financial decisions than white wives. In the area of marital role ideology; specifically, with regards to wives‘ attitudes about husband-wife authority, black wives appear to exhibit more traditional attitudes than white wives with respect to the balance of power within the husband-wife dyad. No support is found for those suggesting that the black subculture is characterized by a matriarchal pattern. Future research should be conducted to determine if these findings hold for other decision areas as well. In addition, note the extreme range of scores on some of the specific financial decisions. For example, nearly two-thirds of white wives and half of the black wives unilaterally decide on when to open the checking account; whereas, less than 10% of both black and white wives unilaterally decide on whether the family has enough money to splurge on an item both spouses would like to have. 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